The management consultancy Oliver Wyman has published the very informative study “The EU Banking Regulatory Framework and its impact on banks and economy” on behalf of the European Banking Federation (EBF). With this independent study, the EBF wants to contribute to the discussion on regulatory hurdles in Europe. The study focuses on the regulatory costs for EU banks compared to the US. In the following, we summarise the core findings of the study in general and with regard to the importance of securitisation in Europe.
Key findings of the study on the EU Regulatory Framework
- The study reveals the burden that the European regulatory framework places on banks. EU banks face higher average capital requirements than US banks (for Common Equity Tier 1 capital, 10.6% in Europe versus 9.9% in the US). Furthermore, the full implementation of Basel III and capital add-ons related to sustainability issues threaten to make these requirements even more unfavourable for EU banks.
- Oliver Wyman calculates in a scenario that a revision of the current regulations on capital requirements could free up €4-4.5 trillion (!) of credit capacities.
- The European securitisation market lags significantly behind the US market: including the UK, it is only about 6% of the US market, equivalent to about 1% of GDP compared to about 18% in the US.
- A substantial issue for the European market is the fact that banks cannot effectively place their loan exposures through securitisation, resulting in larger and more rigid balance sheets compared to US banks.
- The study shows the importance that securitisation could take: If EU banks could transfer even half of their current mortgage portfolio to non-bank investors, the banks’ CET1 ratio would increase by about 0.9%. This would lead to an increased lending potential of about €900 billion.
Conclusion
The clear results of the study lead Oliver Wyman to formulate a clear call for action. The call for action states that European policymakers must intensify their efforts to complete the Banking and Capital Markets Union. Supervisors should aim to make key processes more efficient and be more vigilant for breaches of the level playing field in EU countries. With regard to the full implementation of Basel III, it points to the risk of EU banks being disadvantaged in the global market.
On the other hand, the consultancy recommends that EU banks focus on improving operational efficiency and digitalisation. It further predicts that the long-awaited consolidation process in the Eurozone will occur and could lead to a better distribution of resources across EU borders.
Against the background of the study’s findings, we are eager to see the EU’s further steps regarding the Banking and Capital Markets Union.