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  • Blog post
  • 24. november 2016

What next for Europe's banking system?

At an event organised by Bruegel, a think tank specialising in economics, the European Commission Vice-President for Financial Services, Valdis Dombrovskis, set out his approach to regulating Europe's banking sector. The upcoming proposal to revise the Capital Requirements Regulation (CRR) and Directive (CRD) was discussed with Guntram Wolff, Director of Bruegel, and Reza Moghadam, Vice-Chairman of Global Capital Markets at Morgan Stanley, as well as experts and audience members, including members of the Library and Research team.

The Commissioner maintained that the EU's regulatory agenda is committed to encouraging a banking sector that is stable, sustainable, diverse and integrated. In order to ensure this, in its upcoming proposal, the Commission will:

  • propose that systematically important banks would have to comply with minimum Total Loss-Absorbing Capacity (TLAC) standards;
  • introduce a binding leverage ratio of 3%, alongside the risk-based own funds requirements in the CRR; 
  • introduce a Net Stable Funding Ratio (NSFR) which will require banks to finance their long-term loans with stable sources of funding;
  • clarify how Pillar II capital requirements should be applied by member states and increase transparency by introducing a disclosure obligation in this area;
  • propose the introduction of an ‘SME supporting factor’ to all small SME loans and to apply similar measures to infrastructure finance.

Reza Moghadam offered a market perspective on the banking system in the EU. Acknowledging the progress in the banking system and the regulatory environment, he underlined that the current regulatory environment is designed for a system functioning in a steady state, despite a different reality since the financial crisis in 2007. He added that while banks are perceived as rather vulnerable, there is still an appetite for investment in European banks. The main concerns for investors are the crisis legacy issues, fragmentation resulting in insufficient cross-border activity, landscape for financial profitability, digitalisation, and the capital markets union especially after the UK's departure from the EU.

After a lively discussion, all experts agreed that economic growth is key to increasing profitability in the banking sector and thus of crucial importance for Europe's financial sector. As both the Commissioner and Reza Moghadam underlined, a regulatory framework is vital for maintaining a responsibly governed banking sector. However, if the Commission wishes banks to expand their lending to the wider economy and be able to compete internationally, two main problems should be dealt with as soon as possible: the inconsistency of regulation across jurisdictions and uncertainty about the regulatory environment.

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