New research suggests EU bank rules boost stability
New research by Dr Eleonora Sfrappini, Lecturer in Finance at the University of St Andrews Business School’s Department of Finance, and colleagues in Denmark and Germany finds that Europe’s more rigid capital rules nudged bank funding costs only in the short term. The findings, published in the Journal of Financial Stability, indicate a short-run adjustment but no longer-term cost.
The Capital Requirements Directive IV (CRD IV) emerged in response to the 2008 global financial crisis and the euro-area sovereign-debt turmoil. Proposed by the European Commission and adopted by the European Parliament and Council in June 2013, CRD IV instructs banks to hold a larger portion of their capital as buffers to absorb losses and maintain lending in times of trouble. Specifically, it introduces five different types of capital buffers along with tightening requirements on remuneration and risk monitoring.
Member states rolled out the directive at different times, which gave the team ready-made before-and-after data on 96 publicly listed banks. Banks fund themselves in two main ways: through debt (by paying interest on deposits, bonds, and other borrowings) and through equity (either by retaining earnings or issuing new shares, with shareholders rewarded through dividends or a higher share price). After the rule took effect within a country, debt became cheaper for banks, while their cost of equity increased. Given the diverging effects, banks overall experienced only a moderate and short-term increase in funding costs.
Across all lenders, the extra funding cost amounted to around a 25-basis-point increase in the first three months and faded within a year. Already reinforced by earlier stress tests, big international banks hardly moved, while smaller banks in countries with looser rules beforehand felt the sharpest, though still temporary, bump.
Central to the research is the Banking Union Directives Database. The team compiled a timeline of the exact dates when every EU country implemented CRD IV and related Banking Union rules and released it online for anyone to download. With all the dates in one place, researchers, students and analysts can examine the impact of these banking reforms or apply this methodology to evaluate the effects of other EU reforms.
Dr Sfrappini said:
“By pinning down the day each law took effect, we show that the implementation of the European Banking Union came at a modest cost for banks’ funding, and our new database now lets anyone run the same test on other outcomes or can inspire others to employ a similar method on future reforms.”