It is indisputable that a significant overhaul of banking regulation was required after the financial crisis, which exposed a range of vulnerabilities in the financial system.

The subsequent regulatory reform programme, which has included over 40 major pieces of legislation, has radically reshaped the way financial markets operate and substantially improved the resilience of the banking sector. New regulations have been introduced to improve banks’ capital and liquidity positions, strengthen market infrastructure and capital markets transparency, and ensure the resolvability of financial institutions. As a result, banks are now much less likely to fail, and where they to do so any losses are expected to be borne by bank investors rather than taxpayers.

Viewed in isolation many of these measures were both necessary and have had their intended effects. Bank leverage has fallen, the quantity and quality of capital and liquidity held by banks has risen strongly, and the overly complex products of the crisis years have largely disappeared. Yet the cumulative impact of the swathe of post-crisis regulations is beginning to give rise to some unintended consequences. The recent launch of a review of the Capital Requirements Directive (CRD IV) on bank financing of the economy is therefore very timely.

The European Commission's (EC) consultation focuses largely on the impact capital regulations have on the availability and pricing of end-user borrowing. It is encouraging that special consideration is being given to the financing for small and medium-sized businesses, corporate borrowing and infrastructure projects, which are key drivers for economic growth in Europe. On the other hand, the consultation ignores key elements of the CRD: leverage and liquidity requirements.

While these requirements are not yet fully applicable, their impact is already felt by banks and their customers since market pressure does not afford banks the luxury of waiting for final regulatory texts or phased-in implementation periods. In response to these and other regulations, banks have sought to refocus their business on key products and service offerings in favour of core clients. This has resulted in fewer financing options and a reduction in choice, particularly for those customers unable to directly access the markets themselves. The impact on overall loan availability in terms of volume and pricing has been relatively muted so far. Borrowers still benefit from the banks’ willingness to absorb often most of the cost of new regulation, rather than pass it on to customers, and from highly expansionary monetary conditions. This is unlikely to remain the case as monetary conditions normalise and bank shareholders increase the pressure on managements to deliver improved returns.

There is also a risk that by focusing on one corner of the canvass we miss the whole picture. Examples of this bigger picture are the planned overhaul by the Basel Committee of the way the capital regime itself functions, or the changes in capital requirements for banks’ trading books. The Basel reforms are clearly evolving towards a capital framework that will be significantly less sensitive to the levels of risk banks face and are likely to have a negative effect on capital allocation to business and productive investment financing. While we have seen reforms which make a strong contribution to financial stability, these other measures have less clear cut financial stability benefits and also carry the potential for larger detrimental impacts on financial markets liquidity. European proposals for the structural separation of trading businesses are also likely to exacerbate the situation.

Something more ambitious is therefore needed to capture the cumulative impact of proposed regulations and the way that different reforms interact with each other and impact on markets. The Basel Committee’s plans to consider the coherence of its entire regulatory package are a move in the right direction. What is conceivable on a global scale must be within reach on a European level.

We therefore believe the EC should turn its focus from a partial consultation of CRD IV to a systematic assessment and review of its entire financial regulatory agenda, both existing and future. Such an approach would improve regulatory coherence and consistency and help strike the right balance between enhancing banking stability and maintaining the efficient functioning of financial markets. It is a bold undertaking but one in which the EC can and should grasp for the benefit not only of European banking and capital markets but European economic growth.