EUROPEAN COMMISSION
MEMO
Brussels, 15 May 2014
Economic review of the financial regulation agenda:
Frequently asked questions
See also IP/14/564
1. What is the EU financial regulation agenda?
The financial crisis showed that a fundamental overhaul of the regulatory and supervisory
framework was necessary. Between 2008 and 2012, a total of €1.5 trillion of state aid
(i.e. more than 12% of EU GDP) was used to prevent the collapse of the financial system.
The crisis triggered a deep recession and led to large losses in output. The EU
unemployment rate increased from a pre-crisis low of 7.2% in 2007 to 10.8% in 2013.
Compared with the end of 2007, an additional 9.3 million people are now unemployed in
the EU. Trust in the financial system has been seriously shaken and many EU households
have experienced significant losses in income and wealth.
In response to the financial crisis, the EU pursued an ambitious regulatory reform agenda
that has been coordinated with international partners in the G20. As the crisis evolved and
specific risks emerged which threatened financial stability in the euro area and the EU as a
whole, deeper integration to put the banking sector on a more solid footing and restore
confidence in the euro was necessary. This led to the development of the Banking Union.
The aim of all financial legislation has been to restore financial stability on a global scale
and build a financial system that serves the economy and can play its part in putting the
EU back on a path of sustainable growth. To meet that overall objective, the Commission
has tabled more than 40 proposals in under five years (most of which have been adopted,
and many of which are already in force). The reform measures deliver on this overall
objective by:
• enhancing financial stability and the resilience of the financial system to reduce the
likelihood and impact of future financial crises in the EU
• restoring and deepening the EU single market in financial services
• securing market integrity and confidence in the EU financial system by protecting
consumers and investors, countering market abuse and enhancing disclosure and
transparency
• improving the efficiency of the EU financial system and ensuring that transaction costs
are minimised and financial services are priced correctly to reflect underlying risks.
MEMO/14/352
Chart: Overview of the reform objectives
2. What is the economic review of the financial regulation agenda?
The economic review study examines the overall coherence of the reform agenda and the
expected or actual economic impact, including the interactions and synergies between
different reforms.
Each Commission reform proposal, when it was adopted, was accompanied by a thorough
impact assessment that evaluated in detail the associated costs and benefits. The
economic review does not replace or supersede the individual impact assessments.
Rather, the study builds on the existing assessments and reviews whether the different
reform measures have delivered (or can be expected to deliver) their objectives and
intended benefits. It also examines the potential costs and adverse unintended
consequences of the rules, as well as the interactions and complementarity between the
rules.
3. Why is the economic review published now?
As this Commission approaches the end of its mandate, it is appropriate to take stock and
review the financial regulation agenda as a whole. Agreement has been reached on the
majority of the Commission's reform proposals, many of which have already entered into
force (e.g. the CRD IV package (MEMO/13/690), European Markets Infrastructure
Regulation (MEMO/12/232), Single Supervisory Mechanism (MEMO/13/780), Short-selling
Regulation (MEMO/11/713)). While it is too early to assess the overall final impact of the
reform agenda, the economic review presents an important first step, of a mostly
qualitative rather than quantitative nature, in a longer process of systematic review and
evaluation of the reforms.
4. What are the main conclusions of the economic review?
The EU financial regulation agenda effectively addresses the regulatory shortcomings and
market failures that contributed to the crisis. The reforms will deliver greater stability and
reduce the likelihood and negative impact of financial crises being repeated in the future.
In addition to enhancing financial stability, the reform measures will help meet the other
key public policy objectives of market integrity (including consumer protection), efficiency
and financial integration.
The total benefits of the financial regulation agenda are expected to significantly outweigh
the costs. Individual impact assessments showed net benefits, and many of the rules
create considerable positive synergies when combined. The reforms are expected to
improve the functioning of the financial system and make it more stable, responsible and
efficient, to the benefit of the EU economy.
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The reforms impose costs, but many of these are private costs to financial intermediaries
that arise in the transition to a more stable financial system and are offset by societal
benefits. The reform agenda has been mindful of the need to minimise costs, allowing
longer phasing-in and observation periods and adjusting rules where significant costs are
anticipated.
While the reforms address the problems revealed by the recent crisis, the risk of future
crises cannot be regulated away. The Commission will remain vigilant and proactive,
monitoring financial innovations and identifying new risks and vulnerabilities as they
emerge.
5. Why does the economic review not contain a quantitative
estimate of the total net benefit of the reforms as a whole?
The full impact of the financial reform agenda can in principle only be assessed in the
years to come, as most rules have only been recently adopted, there are phasing-in
periods and some rules still need to be complemented with delegated and implementing
acts.
Even then it will be difficult to isolate regulatory impacts from other factors, such as the
direct consequences of the crisis (e.g. increased risk aversion, uncertain market
conditions, monetary policy interventions and low interest rates) and wider
macroeconomic, technological and demographic changes. Pre-crisis market conditions
cannot serve as the relevant benchmark, as it is precisely the boom-bust experience which
much of the financial reform agenda aims to avoid being repeated.
In addition, there are severe data limitations that impede the quantitative assessment of
many reform measures. For many market variables, there is either no publicly available
data or the available data does not go sufficiently far back to enable meaningful analysis.
Also, many impacts cannot easily be quantified in available models. It would therefore not
be possible to come up with a reliable and comprehensive quantitative estimate of the
total costs and benefits of regulation.
Therefore, the approach taken in this study is largely qualitative in nature, using
quantitative evidence where available, relevant and appropriate. This study should be
understood as a first step in a longer process of systematic review and evaluation of the
reforms.
6. What are the main expected benefits of the reforms?
The reforms will deliver greater stability and reduce the likelihood and negative impact of
financial crises being repeated in the future. For example, based on simulations by the
Commission, reforms in the banking sector are estimated to deliver macroeconomic
benefits of around 0.6-1.1% of EU GDP per year (or about €75-140 billion per year, based
on 2013 EU GDP), not counting the other reforms that enhance the stability of the
financial sector.
The reforms enable supervisors to oversee markets that had been beyond their reach and
provide transparency for all market participants. They establish ambitious new standards
to limit excessive risk-taking and make financial institutions more resilient. When there is
risk-taking, the burden is shifted away from taxpayers to those who stand to gain
financially from the risky activities. The reforms make financial markets work more
effectively in the interests of consumers, small and medium-sized enterprises and the
economy as a whole.
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The reform measures also deepen the single market in financial services, notably through
the action of the European Supervisory Authorities (ESAs) as part of the European System
of Financial Supervision (ESFS) that has been in force since 2011 (MEMO/10/434).
Furthermore, the Banking Union constitutes a milestone for European integration and is
not only essential for the euro area but for the EU as a whole.
Overall, the reforms therefore help in delivering the overriding objective of building a
financial system that serves the economy and facilitates sustainable economic growth.
7. What are the main expected costs, including unintended
consequences?
Financial reform imposes costs on financial intermediaries (and their shareholders and
employees) as it introduces compliance costs and requires adjustments in the way
business is conducted. A part of these costs are temporary adjustment costs during
transition to a more stable and responsible financial system. The recurring costs that
financial intermediaries will incur on a regular basis to meet the stricter regulatory
requirements after the transition period are the costs that matter more in the long term.
These costs are expected to be more than offset by the benefits of enhanced stability and
integrity of the financial system.
For economic welfare, the aggregate societal costs and benefits are relevant, i.e. the
impact on all stakeholders in the economy, including users of financial services
(e.g. depositors, borrowers and other consumers of financial services), taxpayers and the
wider economy.
The reform process has been mindful of the potential costs of regulation and in particular
the interaction of the new rules with the current difficult conditions in financial markets
and the wider economy, for example by introducing longer phasing-in periods of the rules
and adjusting the rules to minimise anticipated costs.
Quantitative estimates of the macroeconomic costs of banking sector reforms indicate a
long-term negative output effect of about 0.3% of EU GDP per year. By comparison, the
benefits of the same reforms that relate to reductions in the incidence and costs of future
crisis are estimated to be in the order of 0.6-1.1% of EU GDP per year. While subject to
significant modelling uncertainty, the findings of net reform benefits are consistent with
quantitative results from other studies by public authorities.
There are areas of concern where the reforms may have unintended consequences if left
unaddressed. These include, for example, a concentration of risks at the level of central
counterparties (CCPs) and the risk of increases in the cost of financial intermediation.
These risk areas are either the subject of ongoing work and addressed through careful
implementation or are not considered, at this stage, to require immediate policy action.
They will nonetheless be subject to continual monitoring. Ongoing monitoring and review
of all reforms is required to ensure that they deliver their intended benefits while avoiding
the undesired effects.
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8. What does the economic review say about the impact of the
reforms on the flow of finance to the economy?
The financial crisis and the costs it imposed on the economy show that a fundamental
reform of the financial system was necessary. The reforms have been guided by the clear
overall objective of building a financial system that serves the economy better and
facilitates economic growth and jobs in Europe. The financial system can only fulfil its key
function of intermediating finance in the economy if, as a prerequisite, there is financial
stability and if consumers and investors have trust and confidence in the financial sector.
Most of the reforms in the financial regulation agenda aim to do just that.
Furthermore, efforts have systematically been made on a rule-by-rule basis to strike a
balance between ensuring financial stability and allowing a sufficient and sustainable flow
of finance to the economy. The evidence presented in the economic review shows that the
main impediments to the flow of finance in Europe have had little to do with regulation
and that higher capital and liquidity requirements for banks and other rules are unlikely to
have a significant impact on bank lending rates. The reform process has been mindful of
the potential costs of regulation, by granting longer phasing-in and observation periods
and, where required, adjusting the rules.
The reform measures devote particular attention to small and medium-sized enterprises
(SMEs), given their particular difficulties in securing external finance and their important
role in EU employment and growth. The EU financial framework has been adapted
considerably over the last three years, on the basis of an action plan adopted in December
2011. The measures include:
 reducing the administrative burden and reporting requirements for SMEs (Prospectus
Directive, Transparency Directive, Accounting Directive, Market Abuse
Regulation/Criminal Sanctions for Market Abuse Directive)
 creating a dedicated trading platform to make SME capital markets more liquid and
visible (Markets in Financial Instruments - MiFID II)
 addressing the issue of risk weights in the bank capital framework to make SMElending relatively more attractive (Capital Requirements Directive - CRD IV
package), and
 introducing new EU frameworks for investment in venture capital and in social
entrepreneurship funds. The proposal on European long-term investment funds
further aims to ensure the long-term financing of SMEs and key infrastructure
investment. Additional measures to facilitate the long-term financing of the EU
economy are currently being developed, as set out in the March 2014
Communication on long-term financing of the European economy (IP/14/320).
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9. What does the economic review show about the interaction of
the various reforms?
The large number of regulatory reforms at EU level, and their broad scope, is a reflection
of the battery of underlying problems that needed to be addressed. No single reform
would have been capable of achieving the four objectives of greater stability, integrity,
efficiency and integration to improve the functioning of the financial system overall and
facilitate sustainable economic growth.
The combination of different reform measures helps the four objectives to be achieved
more effectively and at lower cost - see table in the annex for an overview. For example, if
higher capital requirements were used as the only regulatory tool to enhance stability in
the banking sector, the capital levels required might need to be set so high that it would
be difficult for banks to raise sufficient capital, given the size and leverage of their balance
sheets. The consequent costs from disruptions to the efficient flow of financial services to
the economy could then outweigh the stability benefits. Complementing the new capital
requirements with further measures (in particular the new framework on bank resolution
and recovery and the proposed bank structural reform helps to meet the stability objective
while limiting disruptive effects.
There are cross-sectoral synergies between some reforms. For example, there are
synergies between the CRD IV package in banking and the European Markets
Infrastructure Regulation reform on derivatives markets. The former imposes higher
capital and collateral requirements on banks concluding derivative contracts that are not
centrally cleared under EMIR. This will encourage a critical mass of contracts to be cleared
through central counterparties (CCPs) and thereby effectively enable central clearing to
mitigate counterparty risk (as intended by EMIR), contributing to financial stability overall.
As a second example, the Credit Rating Agencies regulations are strengthened by
measures in all EU sectoral legislation to reduce the mechanistic reliance on credit ratings.
Finally, requirements for risk retention, due diligence and monitoring of securitisation
positions were first introduced in the new bank capital framework and then extended in a
consistent manner to other sectoral legislation. This cross-sectoral approach reduces the
opportunities for circumventing the requirements by shifting exposures to less regulated
sectors.
Apart from such synergies, the review also examines other kinds of interactions between
different reforms, for example between the CRD IV package, the Bank Recovery and
Resolution Directive and Solvency II.
10. Does the economic review propose any policy actions?
No. The economic review is a Commission Staff Working Document that reviews the
reforms to EU financial services legislation adopted or proposed in the period between
2009 and the first quarter of 2014. While it does not specify new policy actions, the
economic review highlights areas of on-going work (see below). It also emphasises the
need for on-going monitoring and evaluation of the reforms to ensure that they deliver
their intended benefits while avoiding the undesired effects.
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11. Is the EU financial regulation agenda completed?
Much has been achieved in a short period of time, but the reform process is not yet fully
accomplished. Some important reforms still need to be adopted by the co-legislators, in
particular on bank structural reform IP/14/85, shadow banking IP/13/812, and financial
benchmarks IP/13/841). Furthermore, work is still under preparation at international and
European level in particular on a resolution framework for non-banks.
With the majority of reforms agreed, it is now important to ensure effective
implementation and consistent application of the new regulatory framework. Ongoing
monitoring and review is necessary to evaluate implementation and the overall impact and
effectiveness of the reforms. The economic review provides a first step in this process.
The Commission will also continue its efforts in promoting an internationally coordinated
approach in the area of financial regulation. Ensuring regulatory and supervisory
convergence between all major financial centres around the world remains a significant
challenge.
In addition to full implementation of the reforms, regulatory attention is now focusing on
tackling long-term financing and developing a more diversified financial system with more
direct capital market financing and greater involvement of institutional investors and
alternative financial markets. As set out in the March 2014 Communication on long-term
financing (IP/14/320), addressing these issues is a priority to reinforce the
competitiveness of Europe’s economy and industry.
For more information
http://ec.europa.eu/internal_market/finances/policy/index_en.htm#140515
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Annex: Complementarities in achieving the objectives
Primary objective
And how it is reached
A stable financial
system
Avert bank runs
Prevent the buildup of systemic
(macro-prudential)
risks
Reduce procyclicality
Reduce
interconnectedness
Prevent regulatory
arbitrage and close
regulatory loopholes
Ensure resolvability
Address too-big-to-
 CRD IV package (increased loss absorbency; better
liquidity
management;
improved
internal
governance)
 DGS (strengthening the safety net for depositors in
case of bank failures)
 BRRD (orderly resolution, depositor preference)
 Establishment of the ESRB
 Macro-prudential elements in CRD IV package (e.g.
systemic risk buffer)
 EMIR (central
clearing; conservative margin
requirements and haircut policies; prudential
requirements for CCPs)
 increased disclosure requirements (e.g. MiFID II,
SSR, CRD IV package, AIFMD)
 ESRB
 Macro-prudential elements in CRD IV package (e.g.
countercyclical capital buffer)
 CRA regulations (reduced mechanistic reliance of
investors on external ratings )
 EMIR (stable margin requirements and haircut
policies through the cycle)
 Banking sector: Structural reform proposal; CRD IV
package; BRRD (ensures resolvability of banks)
 Securities markets: EMIR (mitigation of counterparty
risk); MiFID (circuit breakers); SSR (restrict short
selling in extraordinary circumstances, ban on
uncovered short sales)
 Asset
management:
AIFMD
(regulation
and
supervision of previously unregulated actors); MMF
Regulation
 Business environment: CRA regulations (improved
quality of ratings); audit reform (ensure highquality audit reports)
 Globally consistent rules for main reforms (e.g.
EMIR, CRD IV package, BRRD, MiFID II)
 Regulation of previously unregulated sectors (e.g.
AIFMD, shadow banking)

 Overall increased transparency vis-à-vis supervisors
and market participants
 BRRD, SRM for Euro area+ and those joining
voluntarily
 Bank structural reform
 Forthcoming: proposal for resolution of non-banks,
in particular CCPs
 Banking sector: CRD IV package; BRRD; SRM;
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fail
Align incentives
Stable and resilient
financial market
infrastructures
A stable shadow
banking sector
A stable and
resilient insurance
sector
Structural reform
 EMIR (by shifting risks from the banking sector to
CCPs)
 Forthcoming: proposal for resolution of non-banks,
in particular CCPs
 Cross-sectoral policy elements (e.g. sanctions,
securitisation, governance incl. remuneration)
 Central clearing of derivatives transactions; trading
on organised, transparent venues (EMIR, CRD IV
package, MiFID II)
 Requirements for investments in securitisation
positions (CRD, AIFMD, Solvency II)
 Internal governance and remuneration (CRD IV
package, MiFID II, UCITS, AIFMD, benchmarks)
 Sanctioning regimes (e.g. CRD IV package, MIFID II,
AIFMD, UCITS)
 Reduce conflicts of interests: CRA regulations; audit
reform; MiFID II (trading platforms; investment
advice)
 Forthcoming: review of the Shareholders Right
Directive
 MiFID II
 EMIR
 CSDR






CRD IV package; Solvency II
AIFMD
MMF regulation
Transparency of securities financing transactions
Solvency II; Omnibus
Establishment of EIOPA
Financial
integration
A reinforced single
market facilitating
the financing of the
economy
 Single rule book
 EuVECAs, EuSEFs, EuLTIFs
Enhanced
supervision and
enforcement
 Strengthening the powers of competent authorities
(e.g. CRD IV package; MiFID II)
 Establishment of the ESFS
 Ensure appropriate supervision of all actors (e.g.
CRA regulations, audit reforms, AIFMD, MMF
regulation)
 Horizontal approach on sanctioning regimes
 SRM, SSM for Euro area+ Member States and those
joining voluntarily
 SRM, SSM for Euro area+ Member States and those
joining voluntarily
Breaking the
adverse feedback
loop between banks
and sovereigns
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Market Integrity
and confidence
Countering market
abuse
 MAR/CSMAD
 Proposal on benchmarks/financial indices
Protection of
consumers and
retail investors
 EU-wide
creditworthiness
assessment
and
responsible lending standards (MCD)
 Standards for better information about financial
products and services and higher standards for
financial advice (MiFID, PRIIPs, IMD II, MCD,
UCITS, PAD)
 Better protection of the assets of consumers (DGS,
ICS, rules on asset safekeeping in UCITS and
AIFMD)
 More secure alternative payment methods (PSD II)
 Prohibition of surcharges (MIF regulation)
 Streamlined switching processes and ensuring
access to basic payment accounts (PAD)
 CRA regulations
 Audit reform
 Accounting reforms
Enhancing the
reliability of
financial information
and credit ratings
Countering money
laundering and
terrorist financing
 AML framework
Efficiency
Reducing the
implicit subsidy for
TBTF banks
 CRD IV package
 Bank structural reform
 BRRD, SRM
Securing more riskreflective pricing





Enhancing
competition and
efficiency
Reducing
information
asymmetries
A financial
framework reactive
to financial
innovation and
technological
development
Ensuring access to











CRD IV package
Solvency II
EMIR
CRAs (facilitating market entry)
MiFID II, EMIR, CSDR (opening access to market
infrastructures)
BRRD (facilitating market exit)
EMIR
MiFID II, PRIIPs, IMD II, DGS, MCD
SSR
AIFMD
Prospectus Directive
ESMA/EBA/EIOPA (powers to temporarily prohibit
certain products or practices)
MiFID II (safeguards for algorithmic and high
frequency trading; OTF); reinforced by MAR
Transparency Directive (to cover Contracts for
Difference)
Payments package
Reducing the administrative burden and reporting
requirements for SMEs (e.g. Prospectus Directive,
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finance
Transparency Directive, Accounting Directive, MAR)
 Creating a dedicated trading platform to make SME
markets more liquid and visible (MiFID II)
 Addressing SME risk-weighting in the bank capital
framework (CRD IV package)
 Introducing new EU frameworks for investment in
venture
capital
(EuVECAs)
and
in
social
entrepreneurship funds (EuSEFs)
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