Never waste a good crisis: European banking regulation in the pandemic

The regulatory framework for banks introduced in the aftermath of the global financial crisis was designed to provide financial stability in good and bad times. Given an external shock, capital buffers are meant to cushion losses and prevent banks from pro-cyclical deleveraging. However, insufficient accumulation of easily releasable buffers ahead of the pandemic, combined with banks‘ unwillingness to use the available ones, made European decision-makers tweak hard banking law during the pandemic. In his policy brief, Sebastian Mack shows that microprudential, monetary and fiscal policy measures together averted a credit crunch. But Europe should revise its macroprudential framework so that it is fully functional in the next crisis.

Image: Fakurian Design, Source: Unsplash