CIAO DATE: 06/2013
May 2013
Danish Institute for International Studies
“From 1 January 2014, EU banks will be stronger”, read the European Parliament’s press release that followed the approval of the new European regulation on capital requirements just two weeks ago. The press release went on to explain that by stepping up capital provisions the regulation will help banks cope better with crises. A new DIIS report questions these claims. Not only is the new regulation insufficient to seriously deal with the problem of bank’s loss absorbency and protect tax payers’ pocketbooks, it actually restrains the ability of individual member states to pursue more stringent regulations on bank capital. This new regulation follows a series of similarly inadequate “recapitalization” efforts orchestrated by the European Banking Authority (EBA) in response to the European banking crisis. The shortcoming that undermines the whole European approach to assessing capital adequacy in banks is the exclusive use of capital measures based on risk-weighted assets as indicators of banks’ soundness and resilience. The DIIS report compares the assessments undertaken by EBA with data on leverage ratios, a measure that is increasingly being thought of as a more reliable indicator of bank resilience. The report finds that, by leverage ratio criteria, the recapitalization of European banks has been nearly nonexistent. The reported increases in risk weighted capital ratios have been little but a smokescreen. Only 7 out of the 24 largest banks in Germany, France, Spain and Italy actually increased their leverage ratio. Furthermore, contrary to conventional wisdom, the least well-capitalized banking sector among the larger Eurozone countries is not the Spanish or Italian, but the German, closely followed by the French. Lastly, European banking would require a fivefold increase in equity capital to reach the levels recommended by scholars – and hence remains highly vulnerable to shocks and dependent on various forms of state subsidies, guarantees and bailouts. Why have regulators not significantly increased equity capital requirements in line with the consensus of leading scholars working on bank capital regulation issues? The report digs into the political economy of capital regulation to answer this question and offers important policy recommendations that would pave the way for better regulation and more resilient European banks.
Resource link: Behind smoke and mirrors: On the alleged recapitalization of Europe's banks [PDF]