Regulation, a lever for financial innovation

A brief analysis on financial regulation and innovation, commented by our expert Paloma Piqueras, Head Regulation & Internal Control at BBVA CIB.

In the last month, there have been over 244K public mentions related to financial regulatory processes. In our latest LinkedIn Trending Data newsletter, we have crossed this data with the more than 726K mentions linked to 'Digital Finance', 'EMIR', 'DORA' and 'MiCA', to offer you a brief analysis on the importance of regulation in the financial sector. In addition, as usual, we have invited one of our experts, in this case Paloma Piqueras, Head Regulation & Internal Control, to share her opinion on this issue.

The great financial crisis underscored the need to have complete, efficient regulation, adapted to the new objectives of EU regulators, and which meets the new demands that arise over time. New developments are emphasizing the need to create new regulatory frameworks in areas that regulators have not yet taken into account.

In just over 20 years, we have seen how the scenario has changed drastically. New technologies such as blockchain, cloud computing, mobile payments, robo-advisors or big data are shaping a changing landscape at very fast speed. And this affects not only institutions but also the population as a whole. At the same time, technology opens up endless possibilities (e.g. NFTs, cryptocurrencies, virtual cards, image identification). However, this entails endless risks for which we are not prepared, given the lack of precedents to learn from.

Regulation is a tool we can use to order and assign meaning to this innovation, and it has an ultimate and priority goal: protection and prevention. The abundance and diversity of new developments in financial regulation can be a springboard to move in the right direction and create a more stable, more united, and better supervised financial ecosystem that can avoid, or maybe even predict, any kind of risk to capital markets in the future.

In the words of an expert

The current regulation, a tailor-made suit for the financial sector

We are currently witnessing a large number of initiatives in financial regulation, comparable to the regulatory overhaul that took place after the Great Financial Crisis (GFC).[2]  The main difference is that the current regulatory reform is much more diverse and serves more diverse purposes. Current regulatory initiatives can be classified as follows:

• Completion of the revision of the financial regulatory framework: The CRR3/CRD6 will implement the final points of Basel 3, which completes the overhaul of the Basel framework. The EU banking regulatory framework, that includes the CRR/CRD and the Single Supervisory Mechanism (SSM), has proved effective in maintaining the stability of the EU banking sector during the recent turmoil period in other jurisdictions. This reform will reinforce the resilience of the EU banking sector.  

• Updating of financial regulations established in the last decade: Some of the measures implemented in the last decade have not worked or have not been as effective as expected and have to be amended to enhance its effectiveness. In other cases, regulators have decided to be more ambitious, for example by moving forward in the Capital Markets Union (CMU); or to address weaknesses in extreme situations as seen recently, for example the extreme volatility in EU energy markets; or to reflect new European goals, such as strategic autonomy in this region.Some of the revised rules include MiFID, which addresses weaknesses in the current framework, like transparency requirements or the promotion of consolidated reporting, which could substantially increase retail and professional investors' access to transaction data, and which will ultimately significantly strengthen the Capital Markets Union. Also the current revision of the EMIR (European Market Infrastructure Regulation), which aims to reduce dependence on the critical infrastructure of the financial markets of a country that is no longer part of the EU. 

• Establish regulatory frameworks to address new needs: Innovation is creating the need for new regulatory frameworks for different areas. For example, a new regulation on crypto-assets (MiCA), blockchain infrastructure (DLT Pilot Regime) or digital operational resilience (DORA).  It is also necessary to establish new regulations on Sustainable Finance, in order to consider climate change in the stability of financial sector entities. Regulation has to ensure that these factors are presented to them fairly.