Chapter 3

Over the last two years, various national regulators in home and host countries have taken measures to raise regulatory standards further (known as "gold plating") and to insulate national banking systems from the funding pressures and capital adequacy concerns experienced by a number of large European banking groups (known as "ring-fencing").

Survey evidence has underlined the risk of faster bank deleveraging in host countries than in home countries (see, for example, the IMF Global Financial Stability Report, April 2012). In response, host-country authorities have introduced measures to ring-fence local capital and liquidity in order to support local lending. Such measures can either take the form of micro-prudential regulation or macro-prudential tools. For instance, at the end of 2011 the Czech regulator announced measures to reduce exposures of banks to affiliated entities mainly impacting transactions between highly liquid subsidiaries and their foreign parent banks. Several other host countries announced similar measures at around this time (see Table 3.4.1). These examples are likely to underestimate the prevalence of actions of this type, as banks report that supervisors also used informal moral suasion, or explicit but unpublished bank-specific guidance through the Supervisory Review and Evaluation Process (SREP) under the Basel II prudential requirements, to restrict the free movement of capital between subsidiary and parent.

Although some host countries implemented stricter national regulations than required by EU legislation well before 2007 (for example, Bulgaria, Poland and Serbia), such measures became more frequent during the crisis. Table 3.4.1 reveals a bunching of both host and home-country measures around 2010-11. These were mostly reactions to the deteriorating capital coverage and funding situation of eurozone banks, or somewhat delayed responses to earlier credit booms in host countries (as in the case of regulations on lending standards in Hungary, Poland and Romania). Prudential requirements therefore appear to have been pro-cyclical, as they were tightened in an increasingly subdued lending environment. Some home authorities, as in Austria, introduced measures and deployed moral suasion aimed at gradually reducing excessive exposures to subsidiaries, and established programmes to support ailing lending to the public and non-financial private sectors at home.

Although the individual legitimacy of these measures cannot in most cases be contested, their uncoordinated application may have had the unintended consequence of fragmenting the EU financial market by increasing the cost of funding for banking groups and provoking further safeguard measures.