What is the possible impact of the CRR and CRD IV on bank financing of the economy?

One of the policy responses to the recent financial crisis has been the introduction of stricter capital requirements for banks. Capital requirements for banks and other institutions are set out in the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV). Tightening rules has since the beginning elicited opposing views about pros and cons of such a regulation and concerns regarding the potential negative impact on bank lending and economic growth. Many central bank and academic papers or surveys have been published – see e.g.

http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp486.pdf

http://www.dnb.nl/en/binaries/Working%20paper%20467_tcm47-319679.pdf

http://www.federalreserve.gov/pubs/feds/2011/201134/201134abs.html

http://www.sciencedirect.com/science/article/pii/S0378426615002927

The conclusions of these papers may be mixed. Carlson, Shan and Warusawitharana (2011) for instance found evidence that: „…all else equal, banks whose actual capital ratios were relatively high had stronger loan growth from 2008 to 2010, during the recent financial crisis, but that there was not an apparent association during the preceding several years.“

In order to assess carefully the impact of capital requirements on funding economy (with a special regard to long-term investments and small and medium enterprises) special clauses have been incorporated into the CRR (Articles 501, 505 and 516) requiring the European Commission to report to the European Parliament and to the Council on these specific aspects of financing. Therefore, the European Commission launched in July 2015 a public consultation to gather views and evidence on these aspects as one of the inputs into the expected reports. The consultation expired on 7 October 2015.

The questions in consultation included e.g.:

• To what extent have CRR and CRDIV affected the level of capital held by banks?
• Are all the new requirements under all circumstances proportionate to the risks they were meant to address?
• What impact are the rules having on lending to smaller businesses, and to infrastructure projects?
• Could some of the rules be simplified or differentiated by risk or size, without compromising on their objectives of financial soundness and stability of banks?

The Commission has received 87 responses and promised to publish a feedback report later this year. The consultation and the responses are available at: http://ec.europa.eu/finance/consultations/2015/long-term-finance/index_en.htm