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ESBG: Capital requirements rules lead to structural effects

Savings, retail bank trade body provides submission to European Commission consultation on possible impact of capital requirements rules.

​​​​​​BRUSSELS, 8 October 2015 – The combined weight of capital requirements rules and low interest rates have made life difficult for Europe's savings and retail banks. In a submission to the European Commission consultation on the possible impact of the CRR and CRD IV on bank financing of the economy, ESBG stressed that razor-thin profit margins translate to the industry's shifting business model away from what they do best – providing financing to real-economy small and medium-sized businesses.

SME risk weighting is a big concern. In comparison with other corporate risk measures, the SME weight is kept at comparable level thanks to the SME discount factor. A 2013 Bundesbank study confirms this. Supervisor-imposed risk-weight floors won't cut it, however, as they tend to be misaligned with actual observed risk levels.

SME lending is unique. More risky compared with large corporates, but idiosyncratic rather than systemic. SMEs are often cautious than big firms, lacking confidence to invest and pessimistic about chances they will obtain finance. Independent SME survey research find acceptance rates for business finance applications are much higher than what respondents' confidence levels of show. This is improving but remains fragile. The SME supporting factor scheme emboldens customers to seek SME funding  and nudge banks to invest available funding. Credit quality assessment does not change in response to lower capital requirements since borrowers' debt servicing ability is unrelated to regulatory capital requirements. . Future global capital standards and the introduction of the NSFR into EU law must take into account their effects on maturity transformation, in particular on SME-lending.

Long-term competitiveness of the banking system is also under threat due to reules related to capital requiremnts. A steady flow of additional rules have brought an array of new barriers to entry, banks are increasing incented to merge. Progress should be made on the supervisory reporting, overlaps should be removed, the Principle of Proportionality respected. Deep concerns persist over macro-prudential tools, namely buffers.  Certain measures add an additional layer of morass, bringing fog to a transparent process, creating a lumpy surface across European jurisdictions. Credit cycles form a prime example, as the counter-cyclical capital buffer tends to create a dissonance, especially as consensus remains weak among supervisors on how credit cycles should be measured. In addition, the systemic risk buffer and the buffer for other systemically important financial institutions (O-SIFIs) is put to work differently in each state – the push for a single rule book gathers dust. Some Member States employ macroprudential capital buffers, ring-fencing banks inside their borders causing intra-EU capital flows to dry up.

>> See the ESBG submission to the consultation

Supervision; Regulation; Capital Requirements Directive and Regulation