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4 Regulatory Capture in the EU: Implications and Challenges for the Banking Regulatory Reform

4 Regulatory Capture in the EU: Implications and Challenges for the Banking Regulatory Reform

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the consultation processes provides some basic evidence of the direction

and strength of influence of the banking industry on the post-crisis regulatory acts.



5.4.1 The Consultation Concerning CRR/CRD IV

A consultation on the ex-post evaluation of CRR/CRD IV was launched

in July 2015. Its basic aim was to determine the perceived impact of

both regulatory acts. The consultation aimed at assessing the effects of the

CRR’s own fund requirements on lending to small and medium enterprises and individuals, as well as the impact of CRR requirements on

the long-term funding provision, particularly for infrastructure projects.

Further questions concerned the design of the new regulatory acts, the

single rulebook and the potential need for its simplification.

The consultation received responses mainly from the banking industry

(52 %). Only 7 % of the responses were provided by suppliers of non-­

banking financial services. Further responses were obtained from public

institutions (15 %), non-financial firms (12 %), private individuals (11

%) as well as think-tanks and trade unions (5 %). The overwhelming

participation of banks in the consultation compared to other stakeholders points to the possibility of banks’ regulatory capture. A further factor

strengthening the potential influence of banks may be the lack of comprehensive answers provided, particularly by non-bank financial companies, to the specific questions in the consultation.

The responses showed the expected divergence of views between the

banking industry and public institutions, as well as between small and

large banks. A drawback of the answers was the lack of provision of

empirical evidence for supporting the views of stakeholders (EC, 2015b).

Apparent differences occurred in the assessment of the impact of CRD

IV/CRR requirements on lending. The banking industry considered the

stringent capital requirements as a factor contributing to the slowdown

of lending, while other stakeholders argued that increased capitalisation

has led to less lending contraction. The banks claimed that during the

transitional period of CRDIV/CRR national supervisory authorities fostered a race to the top in terms of fulfilling capital requirements, which

hampered credit growth. Also, they held the view that increased liquid-



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ity requirements stringency may cause banks to review their core client

contract conditions. Supervisors, on the other hand, argued that there

has been no apparent decrease of credit provision; moreover the aim of

the new regulations is to enhance financial stability and not to boost

short-term lending. The increased stability of the banking sector should

enhance credit supply in the long term. Particularly contrasting opinions

concerned the impact of CRD IV/CRR on financing infrastructure projects. While the industry stressed the constraining effects of capital and

liquidity requirements, supervisors presented an opposite view. The participants highlighted the need to determine the impact of various macroeconomic and regulatory factors on lending to be able to fully answer the

consultation question.

The banking industry was split in terms of assessing the need for

increased proportionality in CRD IV/CRR requirements. Small banks

argued in favour of increased proportionality, as expected, while large

banks claimed the existing additional requirements for large and systemically important banks are sufficient to guarantee proportionality.

Banks also argued in favour of lower risk weights, particularly for assets

within securitisation and credit value adjustment frameworks, as well as

other areas like retail exposures, asset-based loans, corporate lending leasing and factoring, trade finance and infrastructure finance. The answers

from banks and other stakeholders differed also in terms of the scope of

assets which are, in their opinion, affected by the new regulations. Banks

argued that both capital and liquidity requirements impacted a broad

range of assets including loans to households and small and medium

enterprises, securitised assets and derivatives, trade finance instruments,

real estate activities, as well as long-term lending to public institutions. In

contrast, supervisors did not unanimously recognise the impact of CRD

IV/CRR on specific asset groups.

Banks as well as supervisors argued in favour of the single rulebook;

they welcomed the harmonisation of the rules at a supranational level.



5.4.2 The Consultation Concerning BRRD

Further conclusions on the directions of the impact of the industry on

regulations can be drawn from the analysis of the BRRD consultation



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process which took place before its introduction. A public consultation

on the technical details of a possible EU framework for bank resolution

and recovery was launched in May 2011. The majority of the responses

(46 %) was provided by banking industry representatives, 20 % of the

responses came from national public institutions, 2 % from international

supervisors, 15 % from non-bank financial institutions, 7 % from non-­

financial firms, 5 % from private individuals and 4 % from law firms.

Similarly, as in the case of CRD IV/CRR consultation, the overwhelming

participation of the banking industry points to potential regulatory capture of this group. The consultation results showed an overall approval of

the EC proposal to introduce an EU-level resolution framework.

Both banks and supervisors acknowledged the need for the inclusion

of additional elements in the proposed recovery plans such as the identification of potential barriers to their enforcement, the governance of

the institutions and the assessment of the credibility of the plan under

stress scenarios. Differences between stakeholders occurred with regards to

the centralisation of recovery plans on banking group levels. Most banks

argued in favour of the preparation of recovery plans on a group level and

its supervision by the home, consolidating regulator. Supervisors, on the

other hand, opted for oversight by both home and host regulatory authorities of bank group level recovery plans. Some of the banks were supportive of the central mediation role of EBA, but others argued that this task

should be the responsibility of the consolidating supervisors (EC, 2011).

Banks welcomed the EC’s proposal concerning the intra-group financial support, but were opposed to the granting of powers to the supervisor to prohibit or restrict transactions within group financial support.

This solution was, on the other hand, opted for by representatives of

regulators. Banks argued that the granting of restriction rights to supervisors may be used for protectionist activities.

Further differences in stakeholders’ views concerned the scope of credit

institutions that should be required to prepare recovery plans. While

supervisors claimed that all banks should be subjected to this requirement, banks presented mixed opinions, and particularly small banks

opted to be exempted from the rule.

The majority of the stakeholders, with the exception of the ECB, IMF,

and four supervisory authorities, found the proposed preventive powers



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to be a too excessive interference in the banks’ activity profiles, governance and organisation. Supervisory authorities put forward the argument that such powers would clash with the Pillar 2 tools under CRD IV.

Contrasting views between banks and supervisors also emerged with

regards to early intervention powers. The industry found them excessively

far reaching, particularly under the vague conditionality of their enforcement in the situation of a “likely breach”. Supervisors, on the other hand,

welcomed the proposed solutions. Similar divergence between the two

groups was found in the answers to the questions related to resolution

powers.

Apparent differences between large banks and the rest of the respondents occurred also in the opinions concerning the application of debt

write-down or bail-in as resolution tool. Large banks argued that bail-in

debt can be sold on the market, while small banks and insurance companies pointed to disadvantages for small entities in marketing such debt.



5.4.3 T

 he Consultation Concerning Shadow Banking,

FCD and DGSD

Basic conclusions on the directions of the impact of the industry on regulations can also be drawn from the analysis of the consultation on the

Green Paper on shadow banking regulations from December 2012. The

stakeholders participating in the consultation were organisations listed in

the Commission’s stakeholders’ register, that is banks, financial corporations and banking federations (33 %), individual non-registered organisations from the same professional profile (46 %), and public authorities

(17 %). The majority of the submissions came from the financial sector

(EC, 2012).

Differences in opinions between supervisors and industry occurred

in the definition of channels through which shadow banking activities

transfer risk to other parts of the financial system. Particularly, financial industry representatives argued that not all shadow banking entities

pose systemic risk, for instance, the activity of money market funds is

subjected to liquidity requirements and their credit risk and leverage is

low.



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Further evidence of stakeholder activity in regulation can be drawn from

the consultation regarding the Review of the Financial Conglomerates

Directive launched in November 2009. The feedback from the consultation came exclusively from registered entities. Some 78 % of the

responses came from conglomerates, 4 % respectively from authorities,

unions and research centres, and 9 % from associations. The stakeholders

were sceptical in terms of the introduction of remuneration policies in

conglomerates, but supportive in terms of capital requirements as well as

pronounced risk exposures related to non-regulated entities in financial

groups’ risk profiles (EC, 2009a).

Finally, one can also infer patterns of regulatory capture by analysing the DGSD consultation process, launched before its reform. The

consultation took place in 2009. Conversely to the above discussed acts,

the responses received to the consultation on the new DGSD proposal

were more evenly distributed between stakeholders. The received feedback came from banks (28 %), from public institutions (26 %), particularly regulators and supervisors, from non-bank associations (25 %),

from deposit insurers (9 %), from private individuals (7 %) and from

consumer associations (5 %). A substantial majority of the consulting

parties (93 %) agreed that the former version of the DGSD requires revision. The distribution of responses points to a substantial salience of the

deposit guarantee schemes among non-banks (EC, 2009b).



5.4.4 Implications of EU Rules’ Implementation

for Regulatory Capture

The discussed examples of consultation of the main regulatory acts show

that regulatory capture of banks also exist potentially on the supranational level. The main factors contributing to this tendency are the dominant participation of banking industry representatives in the consultation

processes as well as their apparent advantage in providing the most comprehensive responses to the questions posed in the consultative documents. The overall picture of the analysed consultation processes shows

that banks argue in favour of loosening regulations. Moreover, in the case

of some regulations the divergence of preferences of small and large credit

institutions is apparent.



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The review of the consultation processes also shows that the feedback

of the banking industry is substantial for the design of apt, operational

regulatory frameworks. For instance, only banks, as the most affected

among all the stakeholders, pointed to the large complexity of the current

solutions. This concerns primarily the proliferation of capital buffers,

complexity of systemically important banks’ regulation and the excessive

scope for national discretion. Banks directed the attention of regulators to

the increased compliance cost of multiple regulations, an issue which was

not noticed by supervisors or any other stakeholders. They also stressed

the need to adjust the proposed regulations to specific banking types, for

instance the calculation of capital buffers for cooperative banks.

Overall, banks are important contributors to the ongoing regulatory

process in the EU. The interactions between banks and regulators may

produce public benefits through information exchange, provision of data

on bank interconnectedness helpful to counteract systemic risk or the

establishment of joint emergency bank rescue schemes (Woll, 2014). The

transfer of supervisory power to the supranational level under the new

regulatory acts is expected to prevent bank regulatory capture and conflicts of interest between governments and internationally active credit

institutions. Moreover, supranational supervision is expected to reduce

sovereign suasion in supporting national champion banks as well as protectionist measures discriminating against foreign competitors through

regulations. The ties between regulators and industry become looser and

the probability of revolving doors decreases.

One has to bear in mind that post-crisis regulations in the EU lack a

comprehensive addressing of the regulatory capture problem. The pre-­

crisis regulatory capture in the EU persists due to a number of factors

including state ownership of banks (e.g., Sparkassen and Landesbanken

in Germany, the control of “fondazioni bancarie” in Italy over many

credit institutions, Cajas in Spain), common educational and professional backgrounds of bankers and regulators, and the large reliance of

EU economies on banking system financing. A further channel strengthening the mutual connections between regulators and banks were substantial sovereign debt holdings of credit institutions. Due to these facts

banks have a large bargaining power over policymakers and hence manage to dilute regulatory measures. It has even been argued that due to



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these structural characteristics of the EU financial system banks do not

have to lobby directly to water down regulations (Monnet, Pagliari, &

Vallée, 2014).

The crisis triggered reforms aimed at strengthening macroprudential

regulatory stringency, but the tools of regulatory capture have not been

restricted directly. Lobbying possibilities have been limited due to the

increased political salience of regulations, however the resources available

for lobbying activities remaine substantial. No initiatives on campaign

financing or direct lobbying have been undertaken. Not much attention

has been devoted to preventing revolving doors, neither internationally

nor domestically. The problem could be addressed by imposing restrictions on time periods during which employees of the regulatory authority

and banking industry could not move between the two types of positions. Further measures to restrict regulatory capture could be training

and motivational systems for regulators (Baker, 2010). This would help

to reduce excessive reliance of regulators on the data and information

provided by the industry. The mentioned solutions would be easy to

introduce, but their implementation to date is a question of political

willingness. Given the procyclicality of regulatory capture the post-crisis

regulatory solutions may be not enough to prevent the excessive interrelations between regulators and industry. Once the political salience of

regulations weakens then regulatory capture may again be pronounced.



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6

Banking Regulation and Bank Lending

in the EU



As mentioned in the previous chapters, the introduction of the new EU

banking regulations raised concerns about their potential impact on

lending. In the aftermath of the recent financial crisis one could observe

prevalent liquidity constraints and lending contraction. The EU was

particularly affected by the last phase of the economic downturn—the

sovereign debt crisis—which transferred to the banking sector, due to

banks’ large sovereign debt holdings. The ECB introduced several liquidity enhancing measures, and the sudden decline of banks’ performance

and their ability to lend became one of the main triggers of the EU regulatory reform. As a reaction to the crisis, there have also been substantial

changes in regulation at national level (ihỏk, Demirgỹỗ-Kunt, Soledad

Martínez Pería, & Mohseni-Cheraghlou, 2012). Despite the fact, that

there was an effort to harmonise banking regulations at the EU level,

countries differed in terms of individual reforms.

It has been argued that some of the newly introduced EU regulations,

particularly the stringent capital and liquidity requirements, may turn

out to be excessively conservative. The question arose as to whether they

will help to boost, or conversely, impede lending. This chapter endeavours to approach this question and investigates the link between banking

© The Editor(s) (if applicable) and The Author(s) 2016

K. Sum, Post-Crisis Banking Regulation in the European Union,

DOI 10.1007/978-3-319-41378-5_6



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