A Positive Assessment for Reforms of Financial Market Regulation since the Crisis

SAFE scholars analyze the impact of regulatory measures on the German financial market since 2008

The regulatory measures following the financial crisis have made credit institutions and the German banking sector, in general, more stable. This is a result of a study by the LOEWE Centre SAFE (Sustainable Architecture for Finance in Europe) at Goethe University Frankfurt on the macroeconomic and financial effects of the regulatory measures implemented in the German financial sector between 2008 and the beginning of 2018. The analysis concludes that the reform measures have achieved their objectives, such as strengthening market discipline. Network analyses also show that the systemic risk resulting from the mutual interdependence of banks has decreased, leading to the “too big to fail” problem. A further result of the study is that the tightening of capital adequacy regulation through Basel III has not made loans in Germany more expensive, contrary to the fears of some observers.

At the same time, according to the study, there are areas in which potential for improvement seems possible through further fine-tuning of the reforms. "Improvements would be possible, for example, through a uniform regulation throughout Europe of the risks of sovereign bonds, handling of non-performing loans, and an increase of the credibility and effectiveness of the settlement regime," says Professor Mark Wahrenburg. Professor Rainer Haselmann and Professor Jan Krahnen were also instrumental in the evaluation. The economists also suggest that banks should be given stronger incentives to voluntarily create additional equity buffers. In return, they could be relieved of the burden of proving that they meet the regulatory requirements. The researchers also evaluate the European stress test, which was originally a temporary solution: "A cost-benefit analysis of stresstesting procedures should be implemented," says Professor Rainer Haselmann.

In the interdisciplinary study, the authors describe the most important reforms between 2008 and the beginning of 2018 and estimate various effects based on empirical analysis. The measures include the redesign of the Basel III international regulatory framework and other national policies to stabilize the financial sector, the Capital Requirements Directive IV (CRD IV) to be implemented into national law and the Capital Requirements Regulation (CRR).

The authors also analyze the costs of regulation for credit institutions. Currently, the regulation would burden small banks disproportionately. According to the scholars, this could argue in favor of relieving the regulatory burden on very small banks. Once all ongoing reforms have been implemented, the academics believe that the regulatory provisions should be reviewed according to the motto "as much market as possible, as much state as necessary". In addition, their degree of complexity should be reduced where further strengthening of market discipline becomes possible.

The study was commissioned by the German Federal Ministry of Finance as a result of an EU-wide competitive bidding process to obtain expert opinion on the "Evaluation of the macroeconomic and financial effects of the reforms of European financial market regulation in the German financial sector since the financial crisis".


Study (in German)

Executive summary