Featured Product

    ECB Paper Examines Impact of Regulatory Options and Discretions in EU

    May 22, 2019

    ECB published a working paper that examines the implications of national differences in the prudential framework across EU countries in context of the financial crisis. Overall, the study finds that banks established in countries with a less stringent prudential framework were more likely to require public support during the crisis. The paper analyzes the potential reasons for that and investigates the channels through which a laxer prudential framework could have led to higher financial vulnerability of credit institutions over the crisis.

    Prior to the financial crisis, prudential regulation in the EU was implemented non-uniformly across countries, as options and discretions allowed national authorities to apply a more favorable regulatory treatment. The authors of the paper construct cross-country indicators of the effectiveness of the prudential framework for banks in the EU ahead of the global financial crisis. The authors investigate the national implementation of CRDs and derived a country-wise measure of regulatory flexibility (for all banks in a country) and of supervisory discretion (on a case-by-case basis). The paper also provides information on the measures of public support implemented by EU governments during the period 2008-2010 and classifies the various forms of financial assistance (recapitalization, credit guarantee, and liquidity provision). 

    Overall, the analysis suggests that banks established in countries with less stringent national prudential regulation before the crisis were more likely to require government support during the period 2008-2010. The results broadly hold for the indicators of both supervisory discretion and regulatory flexibility, suggesting that the micro-prudential stance of national authorities had relevant implications for the management of bank balance sheets and for the risk-taking incentives of credit institutions. Prudential frameworks also explain banks’ liquidity buffers even in absence of a specific liquidity regulation, which points to possible spillovers across regulatory instruments. The Basel II framework did not include liquidity requirements. The study documents the existence of some regulatory spillovers, since lower liquidity buffers explained by more flexible regulatory frameworks—which established only capital requirements—increase the probability of banks to have been in financial distress. The study also suggests that the composition of liquid assets is important. 

    The results show that a prudential environment in which important options and discretions are maintained at the national level is at best not conducive to a better allocation of risk and may actually foster risk-taking. This supports the ongoing efforts aimed at establishing a level-playing field in banking regulation and supervision across EU countries. The introduction of a Single Rulebook, intended to minimize the differences in prudential regulation across EU countries, provides a relevant contribution to reduce the heterogeneities in the risk-taking of credit institutions, by realigning the regulatory incentives on the basis of a common prudential framework.

     

    Related Link: Working Paper (PDF)

     

    Keywords: Europe, EU, Banking, Basel II, CRD, Financial Stability, Options and Discretions, Single Rulebook, Liquidity Risk, ECB

    Featured Experts
    Related Articles
    News

    MAS Concludes Blockchain Payments Prototype Shows Commercial Potential

    MAS and Temasek jointly released a report to mark the successful conclusion of the fifth and final phase of Project Ubin, which focused on building a blockchain-based multi-currency payments network prototype.

    July 13, 2020 WebPage Regulatory News
    News

    PRA Publishes Public Working Draft of XBRL Taxonomy 1.2.0 for Insurers

    PRA published a public working draft, or PWD, of version 1.2.0 of the BoE Insurance XBRL taxonomy, along with the related technical artefacts.

    July 13, 2020 WebPage Regulatory News
    News

    CPMI Report Sets Out Building Blocks to Enhance Cross-Border Payments

    CPMI published a report that sets out nineteen building blocks for a global roadmap to improve cross-border payments.

    July 13, 2020 WebPage Regulatory News
    News

    EBA Publishes Phase 2 of Technical Package on Reporting Framework 2.10

    EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.

    July 10, 2020 WebPage Regulatory News
    News

    APRA Updates Reporting Validation Rules in July 2020

    APRA updated the lists of the Direct to APRA (D2A) validation rules for authorized deposit-taking institutions, insurers, and superannuation entities.

    July 10, 2020 WebPage Regulatory News
    News

    PRA to Partly Apply EBA Guidelines on Disclosures for COVID Measures

    PRA updated the statement that provides guidance to regulated firms on implementation of the EBA guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis.

    July 10, 2020 WebPage Regulatory News
    News

    EBA Updates List of Correlated Currencies Under CRR

    EBA updated the 2019 list of closely correlated currencies that was originally published in December 2013.

    July 10, 2020 WebPage Regulatory News
    News

    ESMA Guides on Securitization Repository Data Consistency Thresholds

    ESMA published the final report on the guidelines on securitization repository data completeness and consistency thresholds.

    July 10, 2020 WebPage Regulatory News
    News

    FASB Proposes to Delay Implementation of Insurance Contracts Standard

    FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).

    July 09, 2020 WebPage Regulatory News
    News

    APRA Updates Regulatory Approach to Loan Deferrals Amid COVID Crisis

    APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.

    July 09, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5480