16 May 2014

Assessing the impact of the new banking regulatory framework

Piles of coins on a financial magazine - © Sanja Gjenero (freeimages.com), 2009
The JRC provides scientific support to make progress towards a safe and sound EU financial system
© Sanja Gjenero (freeimages.com), 2009

The JRC has contributed to the Economic Review of the Financial Regulation Agenda, presented yesterday by the European Commission. The document assesses the impact of the banking regulatory framework put in place by the EU in response to the financial and economic crisis. JRC analysis assesses the benefits of introducing increased capital requirements and resolution tools for banks, their effectiveness in reducing the probability of future crises and their impact on the society. JRC results were compared with costs estimated by the Directorate General for Economic and Financial Affairs: results suggest that the total expected benefits of the analysed tools will outweigh the expected costs.

In the past years, the European Commission has brought forward a number of legislative measures with the aim of forestalling future crises by improving market transparency, strengthening financial institutions, improving corporate governance, and better protecting consumers.

The Economic Review of the Financial Regulation Agenda includes a quantitative assessment carried out by the JRC of the benefits of implementing the Capital Requirement Directive IV (CRDIV) package and the Bank Recovery and Resolution Directive (BRRD) proposal. CRDIV and BRRD are two pieces of EU legislation which aim at reducing the probability of future crises and at setting up tools which call shareholders and creditors to pay costs of a crisis in case of need. CRDIV introduces an increase in the quality and quantity of the regulatory capital. BRRD sets up resolution tools to cover losses and block any contagion among banks.

The analysis made use of JRC’s Systemic Model of Banking Originated Losses (SYMBOL) and focused on two aspects:

  • the decrease in losses which may potentially hit Public Finances. Results show that the introduction of CRDIV leads to a relative reduction in potential costs for Public Finances between 22% and 33%. When the BRRD is considered, the contagion among banks is stopped and the relative reduction in losses increases up to 92%-94%.
  • the macroeconomic benefits raising from reducing the probability and cost of banking defaults. The net present value of these benefits adds to 21%-122% when introducing the CRDIV, and 44%-156% of GDP when considering the BRRD.

With these studies, the JRC continues its scientific support to the reforms to make progress towards a safe and sound EU financial system. Previous scientific contributions underpinned reforms in the areas of Deposit Guarantee Schemes, Bank Capital Requirements, the Bank Resolution and Recovery Framework and a European Single Resolution Fund.


Key elements of the Economic Review of the Financial Regulation Agenda

The comprehensive assessment of the Commission on the new banking regulatory framework aims at:

  • revising the regulations put in place to strengthen the financial system and evaluating the overall coherence and consistency;
  • evaluating whether the different banking reforms have lived up to the intended purposes;
  • evaluating and quantifying the overall benefits of the reforms with respect to their appropriateness and effectiveness.
Keywords: financial
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