In an opinion piece in “Capital Online” on 11 December, Jan Pieter Krahnen, Director of the Research Center SAFE, writes that during the last years, good progress has been made regarding banking and financial market regulation that improves the stability of the banking system. Nevertheless, further steps are necessary. For example, the stress test carried out by the newly implemented Single Supervisory Mechanism (SSM) in October should be regularly repeated in the future.
Krahnen welcomes the “Bank Recovery and Resolution Directive” (BRRD), that will come into force at the beginning of 2015, as a first step towards a single rule for restructuring and resolution of banks. With respect to the agreement of the G20 in November that large systemically important institutions have to build up an extensive capital stock until 2019, composed of Tier-1 capital and loss absorbing – “bail-in-able” – debt (“total loss absorbing capacity” (TLAC)), Krahnen demands that this debt capital must not be held by banks themselves to avoid contagion risks.
Although not all regulatory efforts managed to achieve the regulator’s objectives, Krahnen draws a positive conclusion: “Altogether, European politicians have reacted in an impressively manner and speed to introduce new and necessary supervisory authorities and regulatory rules after the outbreak of the financial crisis.” The coming years would show, whether these new structures can stand the test in practice.
In an interview with the German business daily “Börsen-Zeitung” of 10 December, Krahnen said that the European Commission’s proposal on the separation of banking activities is a step in the right direction. However, he demands a more detailed rule from the EU to functionally harmonize existing rules of individual EU member states that differ in main points. Also, he does not consider it appropriate to ban proprietary trading in general as proposed by the EU Commission. On the one hand, proprietary trading cannot be counted among the causes of the financial crisis and, on the other hand, it is hardly impossible to make a clear distinction between proprietary trading and market making, Krahnen stressed.