The quickly fading memory of why and when bank capital is important

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The quickly fading memory of why and when bank capital is important

Deregulation should not be equated with lowering capital requirements in the EU

Publishing date: 15 April 2025
Authors: Jesper Berg Nicolas Boivin Hans Geeroms

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Less than fifteen years after the global financial crisis of 2007-2008, banks and policymakers are calling for deregulation and lower capital requirements in the financial sector. They dispute that the Basel framework, the global standards for regulating large international banks, should be implemented fully in the European Union. One concern is that stricter capital regulation will affect the competitiveness of European banks compared to those in the United States and will restrict loan provision in the EU, despite Europe’s significant investment gap.

However, deregulation should not be confused with reducing capital requirements for banks. On balance, there is only limited empirical evidence that respecting the capital requirements necessary to support financial stability hampers credit to the economy, investment or economic growth in the long term. Only well-capitalised banks can continue financing the economy during economic setbacks, and weakening the implementation of the Basel standards increases the risks of a new financial crisis. Bank lending and access to financing surveys also show there is no credit crunch in the euro area at present and that capital requirements are not the primary constraint on credit provision.

A detailed look at current banking regulation does not support the conclusion that European banks are more strictly regulated overall than US banks. A direct comparison suggests rather the opposite. However, the compliance cost incurred by EU banks from current banking regulation can be reduced by simplifying EU rules.

_{The authors are grateful for their comments to Rebecca Christie, Zsolt Darvas, Lucio Pench, David Pinkus, Nicolas Veron, Stavros Zenios and Jeromin Zettelmeyer of Bruegel, Lars Overby of the EBA, Álvaro Ramírez Cárceles of the IMF and Jurgen Janssens, Gregory Nguyen, Honorary Governor Jan Smets and Michael Van Dorpe of the National Bank of Belgium.}

About the authors

Jesper Berg

Jesper Berg is a Non-Resident Fellow at Bruegel. He is a Senior Advisor with Rud Petersen, a public affairs consultancy, a senior fellow at the CIP foundation, associate professor at both the University of Copenhagen and the Copenhagen Business School, department of Finance, a partner in three start-ups, including Chairman of One Health Insurance, and a consultant for the IMF.

From 2015 to 2023, Jesper was the Head of the Danish Financial Supervisory Authority, the integrated financial supervisor in Denmark. Jesper sat on both the management board and the board of supervisors of the EBA and was a member of the ESRB and the Danish Systemic Risk Council. Prior jobs include being a member of the Executive Board of Nykredit Bank, Head of respectively Market Operations, Financial Stability and Payments Systems at the Danish central bank, Head of the Capital Markets and Financial Structure Division at the ECB and being an economist at the IMFs Exchange and Trade Relations Department. Jesper has been on the board of the Danish Foreign Policy Society, The Danish Economist Society, and the Danish Finance Society. He is an honorary member of the latter.

Jesper has an M.Sc. in economics from the University of Copenhagen and an MBA from IMD in Switzerland. He has written extensively on financial and economic issues, including the book “The fall of finance” on the financial crisis (Together with Morten Bech). His research interest includes the financial system and monetary policy.
Nicolas Boivin

Nicolas joined Bruegel as a Research assistant in September 2024. Previously, he worked in foreign affairs as a graduate trainee at the Embassy of Switzerland in Ireland, covering the economy, bi- and multilateral trade and electoral politics.

He earned his two master’s degrees in economics and political science at the London School of Economics (LSE) and the Universitat Pompeu Fabra (UPF). As an undergraduate, he studied analytic philosophy at King’s College London. His MSc dissertation at the LSE developed a game theoretic model to analyse inclusion and exclusion decisions in political groups. At UPF, his MSc project quantified the causal impact of a major childcare reform in New York on women’s labour force participation.

Nicolas is a native English and German speaker and has a working knowledge of French
Hans Geeroms

Hans Geeroms was Senior Advisor for EU Affairs at the National Bank of Belgium until August 2024. As such, he was a member of the Economic and Financial Committee of the EU and of the International Relations Committee of the ESCB. He was the Co-chair of the EU-UK Network, gathering the ECB and the 27 National Central Banks to analyse the consequences of Brexit for the EU and its member states.

He was EU adviser to two Belgian Prime Ministers and worked for the European Commission on the enlargement of the EU, financial support for future member states and approximation of legislation.

Hans is Emeritus Professor of the Katholieke Universiteit Leuven where he lectured EU economic policy and International Economics. He is a visiting professor at the College of Europe where he teaches EU macro-economic policy.

His main fields of interest include: EU-UK relations, EU’s macro-economic policy, financial regulation and the EU’s budget. He has published extensively on these topics and is the author of a textbook on the crisis of the Eurozone and its impact on the EU’s economic governance and one on International Economics.

Hans Geeroms holds a PhD. in economics from the Katholieke Universiteit Leuven.

Theme: Banking and capital markets
Keyword: capital markets financial regulation
Language: English