The European Banking Authority (EBA) has published a report on cyclicality of banks’ capital requirements seeking to clarify whether risk-sensitive bank capital requirements as laid down in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV) create unintended pro-cyclical effects by reinforcing the endogenous relationships between the financial system and the real economy.

The report is in response to a request from the European Commission to contribute to its mandated biennial report to the European Parliament and the Council of the EU (Article 50 CRR) on whether the CRR / CRD IV requirements exert significant effects on the economic cycle and, in light of that examination, whether any remedial measures are justified.

In summary, the report concludes that the impact of regulatory capital requirements, more specifically their risk-sensitivity, under the CRR / CRD IV on the EU economic cycle appears to be limited and, from a cyclical perspective, there are no strong grounds to fundamentally move away from a risk-sensitive capital framework.

View EBA recommends retaining risk-sensitive framework for banks’ regulatory capital, 22 December 2016