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Financial services

The EU’s new bank capital rules and Europe’s missing banking union

  • On May 15 European member states adopted their compromise text for European Fourth Capital Requirements Directive/Capital Requirements Regulation (CRD4/CRR). This is the legal instrument by which the new international ‘Basel III’ capital standards for banks will be written into European law.
  • This is the cornerstone of the European regulatory response to the 2008 banking crisis and the most important piece of legislation to pass through Brussels this year. It is expected to be approved by the European Parliament with limited changes in July. It will be implemented in phases from January next year.
  • In the week in which Spain scrambled into a potentially toxic nationalisation of Bankia, it is worth looking at CRD4/CRR as a product of the unique political economy of banking in Europe. CRD4/CRR bears all the marks of one of the deepest flaws in the Eurozone, and one of the key causes of the current mess.
  • The EU set out to write a single prudential rulebook for a European market in which bank failure remains a uniquely national problem. Why it was never likely to ‘harmonize’ practice in Europe tells us a lot about the current problems of the Eurozone. It also explains why any high hopes for a level European – let alone a global – playing field for banking supervision are likely to remain unrealised.

The views expressed in this report can be attributed to the named author(s) only.