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1 The Regulatory Process in EU Stakeholders: Consultation and Impact Assessment

1 The Regulatory Process in EU Stakeholders: Consultation and Impact Assessment

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5  The Factors Influencing the EU Banking Regulatory... 



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issues Green Papers on the proposal in order to stimulate the discussion.

Based on stakeholders’ comments these documents are than transformed

to White Papers, that is reports, on the basis of which the legislative acts

are built. Public consultations are required by Art. 11 and Protocol No.

2 of the Treaty. They aim at increasing the transparency and legitimacy of

the legislative process and sizing the impact of the proposed regulations

on respective stakeholder groups.

The procedures concerning the impact assessment are laid down in

documents entitled “Better Regulation Guidelines”. They include specific

instruments to be applied in the respective impact assessment elements,

that is, guidelines on planning of impact assessments, the key principles

of the assessment itself, as well as guidelines on preparing proposals, their

implementation and transposition to member states’ legislation. The

document also encompasses guidelines on monitoring and evaluation of

impact assessment, as well as stakeholder consultations (EC, 2015a).

The guidelines on planning of impact assessments prescribe the prerequisites for new initiatives, their validation scope and process. The main

prerequisite to allocate resources for an initiative is its political validation

by the relevant Commissioners and Vice-Presidents. The new initiatives

are encoded by the EC Directorates in the so-called Agenda Planning

documents.

Impact assessments are aimed at collecting information that should

help to evaluate the need to introduce new regulations and to create an

optimal framework to reach the specified policy objective of the new

regulation. An impact assessment identifies the regulatory issue, sets out

the policy objectives and options, and evaluates their economic and social

impact.

The guidelines on the impact assessment set out the key questions that

should be answered by each assessment, the requirements for the joint

reports on impact assessment as well as its evaluation as being fit to be

transposed into a legislative act. The drafts of the impact assessments have

to be evaluated by an EC organ—the Regulatory Scrutiny Board (formerly

the Impact Assessment Board)—in terms of their quality and compliance

with guidelines on regulatory fitness. Besides scrutinising evaluations the

Regulatory Scrutiny Board issues opinions aimed at improving the quality of evaluations and guidelines for future assessments.



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New legislative proposals are referred to in the guidelines as major

initiatives. The EC establishes specific consultation strategies for major

initiatives in order to reach the targeted stakeholders and apply convenient forms of consultation. Major initiatives have to be accompanied by

Roadmaps, which describe the objectives of the proposal, policy options

and expected value added, as well as the key elements of the consultation strategy. Roadmaps legitimise the political validation of the projects and provide regulation stakeholders with information on upcoming

consultations, impact assessments and evaluations. The EC publishes the

Roadmaps at the beginning of the initiative assessment to allow stakeholders to prepare and give proper back-up.

The most common form is online public consultations. Potentially,

the EC can also conduct targeted consultations in the form of meetings, workshops, seminars, as well as business representatives’ panels. In

order to avoid regulatory capture through targeting particular groups, the

EC follows principles for stakeholder mapping. The EC consults a broad

range of stakeholders. Conforming to the Better Regulation Guidelines

standards, stakeholders fall into three groups: the ones affected by the

regualtions: the ones who will have to implement the regulations; and the

ones who have a stated interest in the regulations. The Better Regulation

Guidelines specify the time frame within which the public should give

feedback on the proposal. They also specify the standards for consultation

and the underlying principles. These involve particularly the clarity of

consultation procedures, disclosures and acknowledgment of feedback.

The consultation process is open to all potentially interested parties.

These include citizens, business representatives, public institutions, local

authorities and non-governmental organisations. The technical issues

relating to the proposals are consulted with experts from the banking industry itself. The organisation of regular consultations with large

groups of stakeholders helps to obtain crucial data for supervisory processes, information on current and future developments in the regulated

industry and to assess the joint interpretation of the underlying challenges (Woll, 2014).

Conforming to the Better Regulation Guidelines stakeholders should

provide feedback on the respective Roadmap, which sets out the EC’s

actions concerning the legislative proposal. The consultation process is



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concluded by an overall report on the feedback provided by the stakeholders, which is communicated to the public.

Conforming to a study on consultation feedback, conducted between

1997 and 2012 by Pagliari and Young, the majority (c.a. 45 %) of the

stakeholders involved in the consultation process are representatives

of the banking industry, while the share of non-governmental institutions amounts to only 6.7 %, the share of research institutions to 3.65

% and the share of consumer groups to 1.15 %. The reasons for the

scarce participation of the non-bank stakeholders are manifold. First of

all, the technical complexity of the banking regulatory consultations is

an impediment to the participation of stakeholders who do not possess

the specific knowledge required. Moreover, regulations affect the banking

industry directly and immediately while their effect on other groups, for

instance customers, is postponed. This difference creates various incentives for participation in the consultation. Finally, the banking industry

representatives are mobilised stakeholders, while other interested parties are more dispersed. Banks are also linked more closely to regulators

through common professional experiences (Pagliari & Young, 2012).

After the feedback report has been published, the EC can proceed with

the implementation of the regulation. The Better Regulation Guidelines

prescribe rules on preparing proposals and their implementation. The

document puts forward the need to prepare implementation plans and

to anticipate potential implementation problems. The plans should be

specified for all major initiatives. They should identify implementation

challenges and define necessary support actions. Moreover, the Better

Regulation Guidelines set out legislative drafting requirements with reference to the Interinstitutional Agreements that specify EU-wide standards and drafting practices, and put forward the use of codification and

recast techniques aimed at facilitating the drafting of legal acts.

The implementation of regulations at national level proceeds either via

directives or directly binding regulations. The EC assesses the compliance of the transposed directives with the EU legislation in terms of their

transposition status and conformity with the EU legislative acts.

Once the new regulation is introduced it is assessed ex-post by means

of evaluations and fitness checks. Evaluations compare the performance

of the regulation with the predictions of the preceding impact assessment



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and with respect to unpredicted and unintended effects. The evaluation

also assesses the further validity of the regulations, potential necessary

improvements or repeal. A fitness check, on the other hand, assesses the

contribution of the new regulations to the achievement of the intended

policy objectives. In particular, it is helpful to identify regulatory loopholes, overlaps and synergies.

Given the described “open book” legislative process, a number of stakeholders can influence banking regulations. All the parties participating in

the consultation process may have an impact on the final legislative act.

The fact that the technical issues relating to the proposals are consulted

with experts from the banking industry itself may give rise to excessive

industry influence on regulations. Moreover, the predominance of banks

as consultants of legislative acts may strengthen this tendency. As a consequence, there is often watering down of initially strict regulatory proposals. This was the case, for instance, for the mentioned Basel III elements

implemented in CRD IV. Nevertheless, the regulations have to be finally

approved by the Parliament and the Council; both are expected to act

in the public interest. Further impact is exercised by national regulators,

who may follow their own objectives.



5.2 Theories Describing Regulatory Choices

Banking regulation is determined by a number of interacting economic

agents: banks, regulators and other stakeholders. The two extreme views

on the relation between regulators and industry are described as regulatory capture and financial repression. The first one refers to the situation

where government agencies are dependent on the banking sector and

hence the industry is capable of influencing regulatory processes. The latter term indicates that regulators subvert markets and take advantage of

the banking system in order pursue their own objectives.

Since regulating banks requires specific knowledge, this task is delegated by legislators to bureaucratic experts. Nevertheless, legislators have

a stated interest in the outcome of the regulatory process (Rosenbluth

& Schaap, 2003). Thus the theories of regulation are based either on

legislative or bureaucratic incentive factors shaping regulations (Joskow



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& Noll, 1981). Legislative incentives are related to the features of the

electoral process; that is the possibility of affecting voter information and

motivation. Bureaucratic incentives are related to the regulation making

process itself, for instance stakeholder targeting in consultation.

Banking regulatory choices are described by three basic theories: the

public interest theory, the private interest theory and the regulatory dialectics theory. Conforming to these theories regulators follow, respectively, the public interest, the influence of private subjects or react to

the current situation in the banking sector when establishing regulations

(Kane, 1987; Kara, 2013; Kroszner & Strahan, 1999). The ongoing regulatory process in the EU seems to give support to each of these theories to

an extent. Given the “open book” legislative process of regulatory frameworks, regulations will be prone to influence from the banking industry.

This would lend support to the private interest theory. This will not be

possible if the regulations are shaped according to the public interest theory. In this case, the regulatory authority follows public objectives, corrects market failures and maximises social welfare. The current changes

in banking regulations on the national and supranational level seem to

follow the public interest, since regulators aim at mitigating excessive risk

taking by banks, prevent risk shifting incentives and enhance corporate

governance (BCBS, 2011; Young, 2013).

Nevertheless, regulators have multiple objectives, motivations and

responsibilities. It is improbable that they will try to maximise only the

social welfare. According to the regulatory dialectics theory, banking

regulation is an effect of reactions to bank behaviour, especially risk taking changes (Kane, 1987). Such regulatory tendencies became especially

apparent after the latest financial crisis (BCBS, 2011). The mentioned

theories refer to many channels through which banking regulations can

be influenced. These channels are reviewed in the next three sections.



5.2.1 The Public Interest Theory

As explained in Chap. 1, banks fulfil a special function as liquidity providers; they are prone to moral hazard arising from deposit insurance,

which again is necessary in order to avoid possible creditor runs. Given



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