Assessment of the Cumulative Impact of Various Regulatory Initiatives on the European Banking Sector

15-07-2011

In this study we assess the most important current regulatory initiatives for the banking sector to the extent possible and on the basis of existing literature. An extensive overview of relevant considerations regarding each measure is followed by a holistic impact assessment. While a direct impact on the real economy through a change in credit supply by banks is assessed to be small, it is difficult to judge the measures’ overall indirect influence on increasing stability. For this purpose six distinct stability objectives are put forward and the measures’ expected impact on each is assessed in detail. These objectives are: (1) reduction of procyclicality, (2) reduction of misguided incentives, (3) creation of a level playing field, (4) internalisation of social costs, (5) increasing transparency and (6) increasing consumer/investor confidence. According to the survey conducted for this study among German financial market experts, the current state of effective regulation is deemed to be exceptionally insufficient with regard to the first three stability objectives. This study implies that for those objectives the impact of the entirety of regulatory efforts is likely to be most salient, but also most ambiguous. The assessment indicates where the design of effective regulation may be particularly challenging and points out possible detrimental effects on financial stability.

In this study we assess the most important current regulatory initiatives for the banking sector to the extent possible and on the basis of existing literature. An extensive overview of relevant considerations regarding each measure is followed by a holistic impact assessment. While a direct impact on the real economy through a change in credit supply by banks is assessed to be small, it is difficult to judge the measures’ overall indirect influence on increasing stability. For this purpose six distinct stability objectives are put forward and the measures’ expected impact on each is assessed in detail. These objectives are: (1) reduction of procyclicality, (2) reduction of misguided incentives, (3) creation of a level playing field, (4) internalisation of social costs, (5) increasing transparency and (6) increasing consumer/investor confidence. According to the survey conducted for this study among German financial market experts, the current state of effective regulation is deemed to be exceptionally insufficient with regard to the first three stability objectives. This study implies that for those objectives the impact of the entirety of regulatory efforts is likely to be most salient, but also most ambiguous. The assessment indicates where the design of effective regulation may be particularly challenging and points out possible detrimental effects on financial stability.

Awtur estern

Michael SCHRÖDER (Centre for European Economic Research, ZEW GmbH), Jesper RIEDLER (Centre for European Economic Research, ZEW GmbH), Lena JAROSZEK (Centre for European Economic Research, ZEW GmbH) and Gunnar LANG (Centre for European Economic Research, ZEW GmbH)