Anti-competitive regulations and the harm they cause (Part 7)
This question is often posed to Brexiteers, usually by those who believe Eurosceptics lack detailed arguments or, worse still, didn’t know precisely what they were voting for. Though this may be true in some cases, EU-friendly commentators are also, at times, guilty of a myopia of their own – assuming that the current regulatory status quo automatically equates to ‘best practice.’
In reality, the European Union has been responsible for a raft of regulations which have caused great harm to businesses and consumers. While much is made of the compliance cost of certain regulations, less attention is generally paid to the anti-competitive harm they cause. Increasing costs for certain firms, and forcing some (especially smaller, firms) to exit the market can have the effect of raising prices for consumers and diminishing capacity. Anti-competitive regulations make it difficult for new competitors to enter the market, thereby entrenching existing companies and leading to the formation of oligopolies.
This blog series examines a number of regulations, with anti-competitive effects, to illustrate how they work and the distortions they cause.
Capital Requirements Directive and Capital Requirement Regulation
The Capital Requirement Directive (CRD IV) and Capital Requirement Regulation (CRR) are the EU’s interpretation of the Basel III, the internationally agreed standards developed by the Basel Committee of Banking Supervision (BCBS) after the financial crisis of 2007/8. However, while the Basel III capital adequacy agreements only apply to ‘internationally active banks’ outside the EU, within the EU, the Capital Requirement Regulation (CRR) and Capital Requirement Directive (CRD IV) apply to all banks and investment firms regardless of whether they are internationally active or are large enough to pose a systemic threat to the market.
What was the goal of the regulation?
The underlying objective of these internationally agreed standards is to avoid systemic risk, market fragmentation and regulatory arbitrage. The goal was to reduce the risk of the failure of a Systemically Important Bank causing international financial contagion as happened in the financial crisis of 2007/2008.
Was this regulation ever necessary?
Yes, this regulation was necessary for internationally active banks including EU financial institutions that trade in other EU member States. However even the European Commission acknowledges that EU consumers largely purchase financial products in their domestic market and firms overwhelmingly serve markets in which they are physically established.
Why are CRD IV and CRR anti-competitive?
According to the EU, the share of consumers who have purchased banking products from another Member State was less than 3% for current accounts, credit cards, and mortgages. Even within the Eurozone, cross-border loans account for less than 1% of the total household loans in the area. In insurance, cross-border provision of services accounted for only about 3% of total gross written premiums. Yet all financial service institutions, regardless of size or risk profile, must comply with CRR and CRD IV. This increases the amount of capital that a financial institution must hold, and reduces the amount they can lend to, underwrite or invest in the wider economy.
In fairness to the EU they are reviewing this policy now but as with all things in the EU, it may take some time to change. Once the UK leaves the EU, domestically focused UK financial services firms – which do not cater for clients outside of the UK – will no longer need to comply with the international standards of Basel III/CRR & CRD IV. This should make the UK market more competitive by increasing the amount of capital that is available for local clients and businesses.
 EUROPEAN COMMISSION, Brussels, 10.12.2015, COM(2015) 630 final, GREEN PAPER on retail financial services