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Business models in prudential policies

Author(s): Isabelle Vaillant and Marina Cernov

Date published: Dec 2018

SUERF Policy Note, Issue No 50
By Isabelle Vaillant and Marina Cernov, European Banking Authority

JEL-codes: G280.
Keywords: proportionality, business model, regulation, supervision, impact assessment.

Following the financial crisis of 2008, there has been a wave of regulatory reforms aiming to address the weaknesses in the financial system. A lot has been achieved since then. Basel III has updated its Basel II standards in two major waves of reviews. In the first wave, regulation has incorporated a systemic perspective to capital, adding liquidity, leverage and interest rate risks requirements to the mix, while in the second wave it revised its current approach to risk management in the areas of credit risk, market risk, Counterparty Credit Risk, Credit Valuation Adjustments (CVA) and operational risk.

All these initiatives were necessary to reduce the risks in the system and the regulation became more robust, broader in scope, and more forward-looking. It became more robust because of initiatives to improve the quantity and quality of capital, revisions to credit and counterparty risk, market risk, CVA and operational risk management to improve risk sensitivity, as well as the setting up of a backstop measure to undue variability of prudential outcomes in the form of a revised output floor. The regulation also expanded its scope of risks coverage, now encompassing areas such as leverage and liquidity, in addition to risk-based capital. Finally, the regulation became more forward-looking, taking into account aspects such as systemic risk, countercyclical buffers and other macroprudential measures and finally resolution regimes.

Financial regulation however also became more complex. Trying to reflect a quite exhaustive set of risks and keeping risk sensitivity as a very desirable target line led us to design lengthy pieces of regulation. Until now we were asking ourselves the question: Did we get it right? Will it be enough? It may be time to step back and ask ourselves the questions: Do we have a fitted suite of tools and ability to do a smart supervision ? Is it proportionate?

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SUERF Policy Note, Issue 50SUERF Policy Note, Issue 50

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