Comments on the Public Consultation

The Global Financial Crisis as well as the Eurozone Banking and Sovereign Debt Crisis revealed deficiencies in bank regulation which made banks vulnerable to stress in interbank markets as well as to stress in sovereign debt markets. Deteriorating banks' balance sheet quality weakened banks’ loan supply. Especially loans to small and medium-sized enterprises became restrictive during these times of stress. Among reforming bank supervision, the European Commission strengthend bank regulation by applying the Basel III recommendations to European law in form of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV). CRR and CRD IV require banks to increase the quality and the quantity of their equity capital base. Moreover, it sets new standards for banks' liquidity holdings as well as for their funding base. Reforms are based on the fact that banks, which faced the most severe problems during crisis times, were undercapitalized and relied too much on short-term wholesale market funding. However, it must be acknowledged that banks, which fared more well during stress times, had a larger capital base and a more stable funding base. Although the different bank business models fared differently well or poorly during stress times, CRR and CRD IV apply to all European banks equally. The basic question arising here is: if CRR and CRD IV made banks more stable and fostered a more stable loan supply, or if the regulatory measures lead to a lower capacity of banks to lend to the real economy.

The European Parliament and the Council introduced review clauses into the text of the CRR, which mandate the Commission to conduct an analysis of how the provisions of CRR affect banks’ capacity to finance the economy. The public consultation runs until October 7th, of 2015 and aims to address (European Commission, 2015) the following aspects:

• the role of CRR and CRD IV in bank recapitalisation,
• the impact of CRR and CRD IV on bank lending in general,
• the impact of CRR and CRD IV on lending to small and medium-sized enterprises,
• the impact of CRR and CRD IV on lending to infrastructure projects,
• the proportionality, i.e. how CRR and CRD IV affects different bank business models,
• the scope for simplification, and the single rulebook.

The Cologne Institute for Economic Research (IW Köln) takes part in the consultation by answering the Commission’s consultative document.