New rules for the financial sector to reduce systemic crisis probability
On 20 July the Commission proposed more stringent requirements for banks and investment firms. The rules were designed to prevent the world banking system facing another crisis with insufficient quantity and quality of capital.
The JRC has analysed long-term implications and costs-benefits of the package, finding that new rules would lead to a reduction in the probability of systemic crisis of at least 29%, and up to 90% for some Member States.
Under the new proposed rules, banks and investment firms will need to hold more and better minimum capital than in the past; they will need to build up 'capital buffers' over time so they will have money on-hand in an economic downturn; they will need to monitor closely their liquidity positions and leverage and improve corporate governance practices in order to increase risk awareness. In cases of non-compliance, they will face supervisory intervention and sanctions.
The JRC's cost-benefit analysis, carried out by the Institute for the Protection and Security of the Citizen (IPSC), aimed at finding a balance between the costs that the banks would have to face due to more severe prudential rules, and the benefit in terms of financial stability. The analysis was based on SYMBOL, a modelling tool developed by the JRC and DG MARKT that estimates the probability and magnitude of economic losses and liquidity shortfalls in the banking system.
The Commission proposals, which consist of a draft Directive and Regulation and are intended to replace Directives 2006/48/EC and 2006/49/EC, directly relate to the Basel III package, which contains detailed rules of new global regulatory standards on bank capital adequacy and liquidity. It is expected that they will be adopted by the European Parliament and the Council of Ministers during 2012.
SYMBOL is being used by the Commission for quantitative analyses and impact assessment of all the Commission's initiatives to strengthen the efficiency and the stability of the financial sector, including the proposal for a new Directive regulating the protection of bank depositors, the proposal for an EU Framework for Bank Recovery and Resolution and a Working Paper on the Financial Sector Taxation.