EU banking regulation on capital and liquidity ten years after the crisis: the Slovenian perspective

Abstract

This paper is about the EU banking regulation, which was an important factor in many EU countries contributing to the 2007/2008 financial crisis. Its purpose and value added is to present regulatory weaknesses most relevant for Slovenia. Most notably regarding the absence of rules limiting short-term borrowing on wholesale markets, and procyclical accounting rules which impacted capital adequacy. In the last ten years, the EU banking regulation has been subject to extensive modification. We find the introduction of the Liquidity Coverage Ratio (LCR) was an important improvement. However, the Net Stable Funding Ratio (NSFR) which was designed to address borrowing on wholesale markets is not yet legally binding. Both ratios have a drawback that they may be subject to a cliff effect. Accounting rules were amended with the new accounting standard IFRS 9, but we find that the problem of procyclicality remained.