Commissioner for Financial Stability, Financial Services and Capital Markets Union
The Impact of the CRR and CRD IV on Bank Financing of the Economy
It's a pleasure to welcome you to this conference. To many people, a conference on the impact of the capital requirements regulation and the capital requirements directive might seem far removed from day to day concerns. But of course there is a direct link between these technical and detailed pieces of legislation and the every-day lives of our citizens. A direct link between the stability of our banks, the strength of our economy, the resilience of our financial system and the well-being of taxpayers.
As you know, the capital requirements regulation, CRR, and its sister directive CRD 4, are the centre piece of the regulatory architecture that has been built up in recent years. They are our response to a crisis that wiped out the entire capital base of many banks. This legislation set out to make sure that our banks would have sufficient capital buffers to deal with both expected and unexpected events.
Today, there is no doubt that these reforms have made the financial system stronger. Last year's Comprehensive Assessment confirmed that our banks are now more resilient and better capitalised – by over 200 billion euros just in 2014. EU banks' capital ratios now stand at 12%, a similar level to the United States.
So why are we reviewing the CRR? Well, first, because the requirement for a review was written into the original legislation. It is one of the good features of European law-making that we always review what we have done. But even if there wasn't a legal requirement I would want us to be looking at its effect. As we move on from the financial crisis and think about how to boost jobs and growth, we should check that our legislation is working as intended. That it's keeping our banking sector well capitalised, while still allowing our banks to lend and invest.
So what we’re discussing today has very concrete consequences. It goes to the heart of the role banks have in the wider economy. It's about making sure Europe's diverse banking sector can play its full part in Europe's recovery.
Our consultation has gathered views from across the piece, from governments, banks and supervisors. We've been through the responses, separated evidence from opinion, and we're now drawing up our conclusions. These will guide us as we work to complete this review next year.
Today, we’d like to draw on your expertise to help us on our way as we gauge what follow up is needed in our three priority areas: supporting lending to SMEs; encouraging long-term investment; and ensuring our legislation is proportionate. To get the ball rolling, I thought I'd say a bit more about the responses to our consultation in those three areas and what our initial thinking is.
Let me start with lending to SMEs. SMEs employ two thirds of Europe's workforce. If we're serious about wanting to create more jobs in Europe, they need to get funding to invest, grow and remain competitive in the face of tough global competition.
In order to encourage lending to them, the CRR’s capital requirements were set 24% lower for bank lending to SMEs that is less than 1.5 million euros. The responses to the consultation were divided as to whether these lower capital requirements are translating into more lending to businesses.
At the moment, the numbers don’t show a significant increase in bank lending to SMEs since the regulation came into force, but suggest it’s remained stable. It may be that the impact of lower capital requirements has yet to be fully felt: that's it's still too early to judge. And the CRR is of course just one of the important factors indirectly influencing lending. But given that overall lending to SMEs has not yet recovered to pre-crisis levels, we need to keep an eye on this.
So we’ve asked the European Banking Authority to bring forward their report on the impact of lower capital requirements on bank lending to SMEs and the risk weightings of SME loans. This analysis will feed into the final CRR review. And we'll be looking into whether banks are sufficiently encouraged to lend to SMEs, both in terms of reduced capital requirements and the amount of lending that can qualify.
Another recurrent theme of the responses was the need to improve other sources of funding for SMEs. Here work is already underway. One of the main goals of the Capital Markets Union is to improve the funding conveyor belt for companies at different stages of development. I'm driving this project forward at full throttle with a series of early actions, like my proposal to reform the Prospectus Directive to make it simpler, faster and cheaper for companies of all sizes to raise capital on the markets. Our work on securitisation and to strengthen European venture capital will also help.
The second key focus of the review is to look at the impact of CRR requirements on the banking sector’s involvement in long-term investment and infrastructure projects. Here, respondents to the consultation have argued that the CRR requirements have reduced the number of projects that banks might otherwise have backed. And there's a feeling that lower capital requirements, like those applied to SME lending, and a better recognition of lower risk levels associated with infrastructure projects, could play a part in improving long term investment.
Alongside these suggestions, many respondents raised the issue of the net stable funding ratio and the leverage ratio requirements. Many believe these could weigh on longer-term, lower risk loans. I want to make sure we get a better understanding of this as we work to apply these rules in a way that makes sense for Europe.
To add to the feed-back we've got from the consultation, we’ve hired an external consultant to provide a quantitative assessment of the impact of capital requirements on the economy, with a specific section on infrastructure. We also want to look at whether other measures we’ve taken, like amending Solvency II legislation to make it more attractive for insurers to invest in infrastructure, are relevant to the banking sector. Would a separate asset class be appropriate for bank lending to infrastructure projects? And if so, what capital requirements should apply?
The third area is proportionality. I have always been clear that we need to take an approach to legislation this is proportionate and that is sensitive to the impact we're having on businesses' competitiveness. So I'm listening very carefully to what you have to say on this subject.
Many consultation responses called for the CRR-CRD 4 framework to differentiate better between institutions to avoid disproportionate compliance costs. I understand that small and medium sized banks feel particularly strongly about this. A more risk based approach was called for by many, while others put the emphasis on the importance of reducing reporting requirements and the administrative burden they feel they are saddled with. So our review will look at whether there is a case to distinguish between large and small banks. And whether it's possible to simplify, and reduce, the reporting burden.
In calling for proportionality, many respondents also looked to the future, and were keen for us to take a proportionate approach to implementing remaining Basel III requirements. I share this concern. We've requested advice from the European Banking Authority on how best to do this.
How CRR options and discretions are being applied across the single market is something our consultation confirms is important. We want to maintain a level playing field. In the Banking Union, the single supervisor’s work to apply options and discretions more consistently should help. As we work to reduce risk in the banking sector, we will look at the way national options and discretions are applied across the EU.
We'll complete our CRR review in 2016. The consultation has shone a spotlight on the areas we need to explore further. We're now deepening our analysis, seeking the advice of experts and refining our understanding, before deciding whether and where action is needed.
The results of today's discussions will shape the reports we'll present to the European Parliament and the Council next year. So I'd encourage you to be frank, to share with us the situation as you see it, and help us check we have the best possible rules that are proportionate to risk, in which banks can prosper, SMEs can thrive, infrastructure can be built and financial stability can be maintained.