How can safer banks hurt the EU economy?

11 December 2019

Position paper

Finance Watch publishes a critical analysis of a report on the EU implementation of the final Basel III framework by Copenhagen Economics for the European Banking Federation. It aims at balancing the public debate around the importance of sufficient capital requirements for the benefit of European societies and economies.

Fundamental questions raised by Finance Watch about the report from Copenhagen Economics commissioned by the European Banking Federation:

  • Level playing field between US and European banks: where is the surprise in the fact that an output floor that sets a floor for capital requirements calculated under internal models at 72.5% of those required under standardised approaches has more impact on European banks than on US banks, given the fact that US banks are already effectively subject to an output floor at 100%? Isn’t the uneven playing field between US and European banks playing today in the direction opposite to the one suggested by the European Banking Federation?
  • Lending to the economy: why should banks decrease the amount they lend to the productive economy when they are subject to higher capital requirements, given the very gradual approach to the finalisation of Basel III (2027) and the already low proportion of their consolidated balance sheet dedicated today to financing the real economy?
  • Raising capital: how can a one-off capital increase of banks lead to a permanent decrease of GDP of the same order of magnitude, in particular given the fact that most banks will be able to increase their capital through retained earnings?
  • Cost of a financial crisis: on what basis can it be justified to quantify the cost of financial crises as a “moderate” 0.6% of GDP given the impact on public budgets and the enormous social cost of the crisis of 2007-2009?