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

Related Articles
News

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
News

OSFI Revises Capital Requirements for Operational Risk for Banks

OSFI is revising its capital requirements for operational risk, in line with the final Basel III revisions published by BCBS in December 2017.

July 18, 2019 WebPage Regulatory News
News

OSFI Consults on Revised Principles for Management of Liquidity Risk

OSFI proposed revisions to Guideline B-6 on the principles for the management of liquidity risk.

July 18, 2019 WebPage Regulatory News
News

ESMA Guidance on Disclosures for Credit Rating Sustainability Issues

ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings.

July 18, 2019 WebPage Regulatory News
News

FASB Issues Q&A on Estimation of Expected Credit Losses by Firms

FASB issued a second question-and-answer (Q&A) document that addresses more than a dozen frequently asked questions related to the Accounting Standards Update No. 2016-13 titled “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

July 17, 2019 WebPage Regulatory News
News

US Agencies Delay Enforcing Volcker Rule Restrictions on Foreign Funds

US Agencies (FDIC, FED, and OCC) announced that they will not take action related to restrictions under the Volcker Rule for certain foreign funds for an additional two years.

July 17, 2019 WebPage Regulatory News
News

SRB Announces SRF Receives Cash Injection, Grows to EUR 33 billion

SRB announced that the Single Resolution Fund (SRF or the Fund) received a cash injection of EUR 7.8 billion from 3,186 institutions in 2019, bringing the total amount in the Fund to about EUR 33 billion.

July 17, 2019 WebPage Regulatory News
News

FASB to Propose to Delay CECL Compliance Deadline for Certain Entities

FASB published a summary of the tentative decisions taken at its Board meeting in July 2019.

July 17, 2019 WebPage Regulatory News
News

IMF Publishes Report on 2019 Article IV Consultation with Vietnam

IMF published its staff report in context of the 2019 Article IV consultation with Vietnam.

July 16, 2019 WebPage Regulatory News
News

European Parliament Elects Next President of European Commission

European Parliament elected Ursula von der Leyen from Germany as the first female President of the next European Commission for a five-year term from November 01, 2019.

July 16, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3476