‘Don’t Crunch My Credit’: Member State Governments’ Preferences on Bank Capital Requirements

Sébastien Commain

doi:10.17645/pag.v9i2.3884

Abstract

Across Europe, banks remain, to this day, the main suppliers of finance to the European economy, but also a source of systemic risk. As such, regulating them requires that policymakers find an appropriate balance between restricting their risk-taking behaviour and increasing lending to support economic growth. However, the ‘varieties of financial capitalism’ that characterize national banking sectors in Europe mean that the adoption of harmonised capital requirements has different effects across countries, depending on the country-specific institutional setting through which banks provide lending to the national economy. This article conducts a new analysis of Member State governments’ positions in the post-financial crisis reform of the EU capital requirements legislation, expanding the scope of previous studies on the topic. Here, I examine in detail the positions of Member States on a wider set of issues and for a broader set of countries than the existing literature. Building on the varieties of financial capitalism approach, I explain these positions with regard to structural features of national banking sectors. I find that Member State governments’ positions reveal a general agreement with the proposed increase of bank capital requirements, while seeking targeted exemptions and preferential treatment that they deem necessary to preserve their domestic supply of retail credit.

Highlights

On 27 March 2020, the Basel Committee on Banking Supervision, the international standard-setter for banks’ capital requirements, announced the deferral of implementation deadlines of the Basel III framework— adopted in response to the global financial crisis of 2008—to ensure “that banks and supervisors are able to commit their full resources to respond to the impact of Covid-19” (Basel Committee on Banking Supervision, 2020)
As for the EU transposition of the final elements of the international standards, it seems that the European Commission (EC) has put on ice the legislative proposal amending the Capital Requirements Directive (CRD) and Capital Requirements Regulation that it was supposed to issue in June 2020
As we could see in the previous section, this general will to find a compromise between strengthening financial stability and preserving lending led Member States to adopt contrasted positions, which reflect the ‘varieties of financial capitalism’ (Howarth & Quaglia, 2013; Story & Walter, 1997) that persist in Europe

Summary

Introduction

On 27 March 2020, the Basel Committee on Banking Supervision, the international standard-setter for banks’ capital requirements, announced the deferral of implementation deadlines of the Basel III framework— adopted in response to the global financial crisis of 2008—to ensure “that banks and supervisors are able to commit their full resources to respond to the impact of Covid-19” (Basel Committee on Banking Supervision, 2020). As for the EU transposition of the final elements of the international standards, it seems that the European Commission (EC) has put on ice the legislative proposal amending the Capital Requirements Directive (CRD) and Capital Requirements Regulation that it was supposed to issue in June 2020. This reaction to the emerging economic fallout of Covid-19 suggests policymakers, first, consider that banks should play an important role in fostering economic recovery, and second, fear that the planned tightening of capital requirements may be incompatible, in the short term, with said bank support of the real economy. I discuss these findings in terms of ‘varieties of financial capitalism’ (5) and conclude (6)

Analytical Framework

Methodological Approach

Definition of Capital

Large Exposures

Liquidity Requirements

Leverage Ratio

Treatment of Mortgage Loans

Supervisory Arrangements

Findings

Discussion of Results

Conclusions