The reforms of the financial market implemented in the European Union since the outbreak of the financial crisis in 2008 have been successful. This is the conclusion of a study commissioned by the BMF and conducted by the Frankfurt-based research centre Sustainable Architecture for Finance in Europe (SAFE).

According to the BMF’s monthly report for March 2019, the study shows that the measures taken have enhanced the German financial sector’s ability to withstand crises overall and have strengthened financial stability. At no significant macroeconomic costs, the financial system has grown considerably more resilient, the study found, and market discipline has improved. The analyses have shown that the measures taken by the EU have neither limited lending nor made loans more expensive in Germany, the BMF stated.

The authors of the study highlight that further action should be taken in some areas in order to reduce risks in European bank balances and to limit any side-effects of the regulatory measures taken to date. Key areas for action include the regulatory treatment of sovereign bonds and the persistently high levels of non-performing loans in some EU member states.

The study entitled “Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise” is available online (in German only).

Thomas Schmitz-Lippert, BaFin Director-General for International Policy, Financial Stability and Regulation, on the topic of financial reforms

“Staying calm in the face of the next crisis is not an option”

According to a study commissioned by the Federal Ministry of Finance (Bundesfinanzministerium – BMF), financial reforms have enhanced the German financial sector’s ability to withstand crises. Does this mean banks can remain calm in the face of the next crisis?

The new regulations make the banking sector more resilient to crises, particularly thanks to increased and improved capital buffers. In this regard, we have indeed learnt from our experience of the financial crisis. However, in terms of competitiveness, German and European banks are not among the front-runners compared with their international counterparts.

We also need to bear in mind that, while the economy has lost some steam, it is still in quite good shape. In Germany, therefore, relatively few companies and households are filing for bankruptcy; in other words, credit risks appear to be comparatively low, with the result that some banks have been sparing with their risk provisioning. If the economic momentum continues to dwindle, increases in risk provisioning will force some banks to work hard to generate sufficient income.

Other factors are technological progress – the keyword here being digitalisation – and increasing competition from outside the banking sector, such as from online payment systems and credit platforms. These competitors are creating major challenges for established institutions and will revolutionise the entire value chain in the financial services sector.

Last but not least, financial market participants are now interconnected in numerous ways. A minor event in a remote part of the world can cause a global avalanche in the financial markets. All it takes is for a local or regional bubble to burst. No, staying calm in the face of the next crisis is not an option.

Will an appropriate solution be found soon for dealing with government bonds and the problem of non-performing loans?

Currently, there are no indications of political majorities in favour of changing the privileged regulatory treatment of government bonds at the global or European level. Relatively large holdings of domestic government bonds in some bank balance sheets and the associated high concentration risks can, however, be compensated by additional individual capital requirements in the Supervisory Review and Evaluation Process (SREP).¹ This problem primarily concerns banks in other member states, or those supervised by the ECB.

The European Commission has been addressing the issue of reducing non-performing loans since 2017 in its action plan.² The European Banking Authority (EBA), the ECB and the European Systemic Risk Board (ESRB) have also been contributing to the implementation of the plan. Individual governments are supporting the reduction of non-performing loans in their countries through additional national measures. These efforts are beginning to bear fruit: we are seeing a significant reduction in NPL ratios. According to the third progress report by the European Commission of November 2018, the gross ratio for all EU banks is now 3.4%, although the situation differs significantly between member states. This therefore remains a huge problem.

What other reforms need to be tackled?

The reform processes are still in full swing. One part of the recently approved banking reform package³, the amended version of the Capital Requirements Directive V (CRD V), needs to be transposed into national law.⁴ The next major regulatory challenge is the implementation of the remaining requirements from the reform package finalising Basel III.⁵

Furthermore, there are the regulatory questions that must be asked in light of the technological advances and the requirements concerning the sustainability of financial products. Standard-setters and legislators are walking a tightrope: they need to create a regulatory framework that can adapt to developments in the financial system whilst at the same time maintaining financial stability. This framework, however, cannot be allowed to become too complex since this would result in disproportionately high costs for institutions and would inhibit innovation. What we need is smart regulation that, even more than in the past, is based on a comprehensive impact assessment and, to the extent possible, prevents unintended consequences.

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