Report from the Commission to the Council and the European Parliament on effects of Directives 2006/48/EC and 2006/49/EC on the economic cycle SEC(2010)754
Date: 2010-06-23
Institutions: European Commission
Subjects: credit guarantee, credit institution, financial instrument, financial solvency, investment company, management audit, provision of services, report, right of establishment

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EUROPEAN COMMISSION 

Brussels, 23.6.2010 
COM(2010)327 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on effects of Directives 2006/48/EC and 2006/49/EC on the economic cycle 

SEC(2010)754 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on effects of Directives 2006/48/EC and 2006/49/EC on the economic cycle 

TABLE OF CONTENTS 

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7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

8. 

Introduction .................................................................................................................. 3 

Sources of pro-cyclicality and their implications for analysis ..................................... 4 

Cyclicality of minimum regulatory capital .................................................................. 5 

Impact of capital requirements on bank lending activity ............................................. 7 

Impact of credit availability on economic cycle .......................................................... 9 

Rationale underlying the calculation of capital requirements.................................... 11 

Measures to address pro-cyclicality ........................................................................... 12 

Capital buffers and provisions ................................................................................... 13 

Smoothening of the MRC .......................................................................................... 14 

Leverage..................................................................................................................... 14 

Measures already adopted by the Commission.......................................................... 15 

Conclusions ................................................................................................................ 16 

References .................................................................................................................. 17 

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INTRODUCTION 

The  minimum  capital  requirements  for  banks  under  the  EU  Capital  Requirements 
Directive (CRD),1 based on the Basel II framework, are risk sensitive: the higher the 
risk,  the  more  capital  a  bank  needs  to  hold  to  meet  that  risk  and  cover  potential 
losses. By consequence, as credit and market risks increase in a downturn, minimum 
capital  requirements  for  banks  will  also  increase  to  meet  those  higher  risks.  Banks 
may need to raise additional capital to meet these higher requirements at a time when 
their capital resources are being eroded by losses and opportunities for raising capital 
are scarce and costly. This may potentially constrain banks' lending capacity into the 
economy. 

The  possibility  that  the  CRD  may  contribute  to  the  pro-cyclicality  observed  in  the 
financial system under the predecessor Basel I framework led to the inclusion in the 
CRD  of  Article  156  which  requires  the  European  Commission  (Commission)  to 
periodically monitor whether the CRD has 'significant effects on the economic cycle' 
and,  in  the  light  of  the  examination,  submit  a  biennial  report  to  the  European 
Parliament and to the Council together with any appropriate remedial measures.  

This report has been drawn up for that purpose. It was prepared in close cooperation 
with the ECB and the Committee of European Banking Supervisors (CEBS) which in 
2006  set  up  a  joint  Task  Force  on  the  Impact  of  the  new  Capital  Framework 
(TFICF).2 In addition to stakeholder consultations that were conducted by the ECB in 
the process of preparing its analytical contribution, the  Commission  conducted two 
on-line questionnaires to facilitate the input from borrowing3 and lending4 parties. It 
has to be emphasised that the analysis provided is indicative given the fact that the 
rules of CRD II5 were only adopted in 2009. 

Comprising Directive 2006/48/EC of the European Parliament and of the Council relating to the taking 
up  and  pursuit  of  the  business  of  credit  institutions  and  Directive  2006/49/EC  of  the  European 
Parliament and of the Council on the capital adequacy of investment firms and credit institutions 
The  mandate  of  the  TFICF  is  to  monitor  the  level  and  volatility  of  banks’  minimum  capital 
requirements as defined by the CRD and analyze their impact on bank lending and the economic cycle.  
A questionnaire to the EU businesses ran from August 12 until September 28, 2009. Via the European 
Business  Test  Panel,  the  business  community  was  consulted  on  their  perceptions  regarding  the 
developments  in  availability  and  conditions  of  bank  credit  since  October  2008.  429  members  of  the 
EBTP  from  28  EU/EEA  countries  filled  in  the  questionnaire.  As  regards  the  company  size  of  the 
respondents, 59% of them were small enterprises, 20% medium enterprises and 21% large enterprises. 
A questionnaire to the EU banking industry ran from May 21 until August 31, 2009. Nineteen responses 
were  received  from  IT,  SI,  BE,  AT,  DE,  UK  and  NL.  Respondents  included  banks  whose  majority 
ownership is private (publicly traded), national cooperative bank networks and publicly owned banks. 
Some  replies  were  submitted  by  national  associations  representing  a  consolidated  position  of  their 
members,  effectively  increasing  the  number  of  individual  credit  institutions  covered  by  the 
questionnaire.  
Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending 
Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, 
certain own funds items, large exposures, supervisory arrangements, and crisis management 

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SOURCES OF PRO-CYCLICALITY AND THEIR IMPLICATIONS FOR ANALYSIS 

Bank  capital  regulation  may  potentially  amplify  the  cyclicality  endemic  to  bank 
lending behaviour. Due to their risk-sensitive nature, capital requirements under the 
Basel II framework, transposed in the EU by the CRD, are expected to rise more in 
recessions and grow less during expansions. Since it may be expensive for banks to 
raise additional capital during economic downturns, this may encourage them to cut 
back  on  lending  instead.  By  contrast,  as  capital  requirements  become  more  relaxed 
during economic upturns, banks may have more room for manoeuvre to extend more 
and / or riskier credit as compared to historical average over the business cycle.  

However,  bank  lending  is  pro-cyclical  in  nature  and  it  cannot  be  assumed  that 
cyclical  capital  requirements  per  se  have  an  amplifying  effect.  Indeed,  the  pro-
cyclical  nature  of  bank  lending  has  many,  often  interconnected  sources6  such  as 
limitations  in  the  measurement  of  risk7  and  information  asymmetries8  between 
borrowers  and  lenders.  Furthermore,  pro-cyclicality  in  lending  may  also  stem  from 
inappropriate responses9 of financial system participants to changes in the economic 
conditions. 

Fluctuations in the quality of banks’ balance sheets are also influenced by accounting 
rules.  In  essence,  the  realised  or  unrealised  gains  due  to  asset  price  increases  as 
reflected in the fair value of assets, or improved credit quality as reflected in lower 
provisioning requirements for banks, could improve banks’ profit and loss accounts 
and  thus  their  own  funds,  thereby  providing  the  basis  for  a  further  expansion  of 
lending.10  

For a thorough description of the main sources of pro-cyclicality and the role of capital adequacy rules 
therein see BIS (2008) and Masschelein (2007) 
In particular, financial institutions have difficulties in assessing absolute level of risk (while they fare 
better at assessing relative risk), especially over a prolonged period, and so rarely identify booms with 
consequences for systemic risk. Measures of risk may be quite low as vulnerabilities and risk build up 
during  the  expansion  phase  but  spike  once  tensions  arise,  for  example,  the  market  risk  embedded  in 
banks'  trading  book  can  be  easily  underestimated  if  measured  over  short  holding  periods.  Such 
limitations  to  perception  of  risk  are  in  part  attributable  to  the  paucity  of  information  regarding  the 
dynamics of systemic risk and are explained by certain theories of behavioural finance such as disaster 
myopia and cognitive dissonance. For a comprehensive review, see Borio et al. (2001) 
When economic conditions are depressed and collateral values decline, information asymmetries with 
respect to the quality of clients’ balance sheets can imply that even borrowers with profitable projects 
find  it  difficult  to  obtain  funding.  When  economic  conditions  improve  and  collateral  values  rise,  the 
opposite situation may occur. This reasoning suggests that pro-cyclical effects may be more pertinent to 
borrowers  which  are  more  prone  to  asymmetric  information,  including  small  and  medium-sized 
enterprises not subject to external ratings and extensive disclosure requirements. 
In  some  cases,  responses  are  explained  by  short-term  bias  of  remuneration  structures  or  herding 
behaviour  (tendency  of  market  participants  to  conform  their  behaviour  with  that  of  their  peers). 
Remuneration  policies  in  financial  institutions  may  have  an  enhancing  pro-cyclical  effect  where  they 
entail (possibly disproportionate) rewards on the upside and insufficient penalties on the downside, e.g., 
bonuses  based  on  short-term  profits  that  are  paid  immediately,  with  no  risk  adjustment  or  deferred 
payment  to  take  account  of  future  performance  of  the  business  unit  or  institution  as  a  whole.  For  a 
comprehensive review, see Borio et al. (2001) 
Conversely, in an economic downturn, market developments may lead to a decrease in the fair value of 
assets  as  well  as  to  increased  provisioning  requirements.  These  downward  adjustments  in  asset 
valuations and increasing loan losses could have an effect on banks to tighten lending standards and cut 
back lending.  

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As  pro-cyclicality  is  driven  by  various  factors,  it  is  difficult  to  identify  the  exact 
impact  of  minimum  capital  requirements.  In  particular,  it  remains  a  challenge  to 
distinguish the effects of loan supply from those of loan demand, especially as shifts 
in demand and supply both have an impact on bank lending rates and credit volumes. 
To  correctly  identify  those  effects,  it  would  be  necessary  to  have  a  detailed  and 
sufficiently  large  data  set,  which  –  because  the  CRD  has  only  recently  been 
implemented  –  is  yet  not  available.  This  first  assessment  set  out  in  this  report  is 
therefore  partly  based  on  qualitative  information  collected  from  banks  and 
borrowers. 

In order for the CRD to have pro-cyclical effects, certain conditions must be fulfilled. 
To determine the extent to which they have held empirically, this report follows the 
structure suggested by the ECB by seeking answers to the following questions: 

–  Does  the  increased  risk  sensitivity  of  the  CRD  framework  lead  to  a  stronger 

cyclicality of minimum required capital (MRC) and, if so, to what extent? 

–  Do cyclical capital requirements have an impact on the level of capital that banks 

hold and impact bank loan supply? 

–  Does  the  cyclicality  of  bank  loan  supply  have  an  amplifying  effect  on  the 

economic cycle? 

CYCLICALITY OF MINIMUM REGULATORY CAPITAL 

With the adoption of the CRD, capital requirements were made more risk-sensitive 
compared  to  Basel  I  by  allowing  banks  to  adopt  approaches  to  determining 
regulatory capital that are appropriate to their situation and the sophistication of their 
risk management. The Internal Ratings Based (IRB) Approach, for instance, enabled 
banks  to  determine  capital  requirements  for  credit  risk  by  using  their  own  ‘risk 
inputs’ such as Probability of Default (PD), Loss Given Default (LGD) and Exposure 
at Default (EAD).11 

to 

Due 
the  expected  enhancement  of  risk-sensitivity  of  regulatory  capital 
requirements under the CRD, it was widely expected that they would become more 
variable  (or  cyclical)  over  time.  Given  that  requirements  for  credit  risk  represent 
more  than  80%  of  overall  MRC  under  Pillar  1,  it  is  generally  considered  that  the 
main  driver  of  potential  cyclicality  of  MRC  is  the  integration  of  the  credit  risk 
parameters  under  the  IRB  approaches  into  calculation  of  risk-weighted  assets 
(RWA), although risk weights  under all three approaches – Standardised Approach 

As regards the relative impact of individual risk parameters of the IRB approach, PD is considered to be 
the main contributor to the cyclicality of the framework, while, to a lesser extent, the effects of LGD 
and EAD may also be relevant. The degree to which capital requirements oscillate may depend, among 
other factors, on whether a Point-in-Time (PIT) or a Through-the-Cycle (TTC) system is implemented 
by banks in their internal rating processes. Typically, TTC ratings do not change rapidly in response to 
fluctuations  in  the  macroeconomic  conditions,  and  thus  are  less  influenced  by  the  economic  cycle 
momentum. Use of TTC rating systems is suggested by the Basel II and the CRD frameworks as a way 
to smooth the potential volatility of the capital requirements. However, due to banks' preferences to use 
recent default data and early warning systems as well as difficulties in obtaining a sufficient set of data, 
they primarily use PIT approaches, especially for exposures to SMEs and retail clients. 

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(SA),12  Foundation  IRB13  and  Advanced  IRB  –  are  expected  to  be  responsive  to 
macro-economic  conditions.  In  case  of  the  IRB  approaches,  as  PD  of  an  exposure 
decreases  in  an  economic  upswing  and  increases  during  a  downturn,  capital 
requirements are expected to fluctuate accordingly.14 

A comprehensive analysis of cyclicality of MRC would require a full business cycle. 
Currently, the available data include only three data points,15 which is not a sufficient 
basis for definitive answers. 

According to the analysis of the TFICF, in December 2008, MRC16 under the CRD 
was lower on average by 10.6% for Group 117 banks and by 6.1% for Group 2 banks 
relative to Basel I.18 At the same time, MRC rose by 8.3% for Group 1 banks and by 
0.1% for Group 2 banks between June and December of 2008. These changes can be 
attributed to an increase in RWA of 8.2% for Group 1 banks and a decrease of RWA 
by  1.5%  for Group 2  banks.  However,  total exposure  amounts  increased  at  a  faster 
rate than RWA, i.e., at 10.7% and 2.8%, respectively, indicating that the increase in 
MRC  between  June  and  December  of  2008  was  not  due  to  an  increase  in  the 
riskiness of exposures.19 

In June 2009, MRC for Group 1 and Group 2 banks continued to be lower under the 
CRD in comparison to Basel I (by 7.7% and 5.5%, respectively). Between December 
2008 and June 2009, RWA of Group 1 banks declined by 2.1% despite an increase in 
total exposures of 0.3%. Group 1 MRC, nevertheless, increased by 3.7%, primarily 
driven by rising deductions for related entities and securitisations as well as shortfalls 
of  provisions  for  expected  losses.  Therefore,  further  monitoring  will  have  to  assess 

Under the SA, requirements are expected to fluctuate less as banks use risk weights based on external 
ratings (which tend to be determined on the TTC basis) issued by external credit assessment institutions 
The FIRB risk-weighted assets for corporate portfolios are expected to be less responsive to business 
cycle than those under the AIRB, as under the latter banks use their own estimates of LGD and EAD. 
Internally estimated LGD and EAD are seen as more responsive to business cycles than the supervisory 
estimates used under the FIRB 
In addition to credit risk parameters, there is likely to be an impact of the use of products of credit risk 
transfer, such as securitisations, on the cyclicality of capital requirements. In favourable circumstances, 
securitisation  markets  support  the  transfer  of  credit  risk  from  individual  institutions,  thus  having  a 
relieving impact on banks’ capital positions. Recent evidence revealed, however, that this risk transfer 
function  might  not  necessarily  be  used  effectively  in  a  stressed  market  situation,  which,  in  turn,  may 
amplify the adverse effects on banks’ capital positions. 
June 2008, December 2008 and June 2009 for about 60-80 IRB banks from fourteen EU countries 
Without taking into account the transitional floors 
A bank is considered a Group 1 bank if its Tier 1 capital is above €3 billion and it is well diversified 
and internationally active 
The  impact  of  the  CRD  on  capital  requirements  from  the  IRB  approaches  to  credit  risk  may  not  yet 
fully be reflected in data disclosed by banks to the extent that banks are applying the partial use of the 
Standardised Approach. In December 2008, the share of banks' partial use exposures was significant for 
both Group 1 (31%) and Group 2 (40%) banks 
Indeed,  MRC  per  exposure  -  a  measure  of  riskiness  -  was  either  unchanged  (for  Group  1  banks)  or 
slightly lower (for Group 2) in December versus June 2008. While Group 1 banks’ portfolio-level PDs 
increased  on  average,  non-defaulted  PDs  were  virtually  unchanged  indicating  that  the  rise  in  average 
PDs was due to a higher number of defaults. To the extent that the rise in PDs reflects an increase in the 
share  of  defaulted  exposures,  the  impact  of  rising  average  PD  on  RWA  (and  on  MRC)  is  less 
straightforward  since  the  risk  weight  on  a  defaulted  exposure  is  zero  (with  some  exceptions  under 
AIRB). The risk is then accounted for by the expected loss, for which risk provisions should be made 
(in  case  of  their  shortfall,  a  deduction  from  capital  is  made).  Furthermore,  LGDs  were  lower  for  a 
number of exposures in December versus June 2008.  

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whether components of the MRC other than RWA contribute to its volatility over a 
longer term.20  

There are a number of factors that may have contributed to this somewhat surprising 
dynamics  of  RWA  vis-à-vis  total  exposures,  including  government  programs  to 
support banks and shifts in bank portfolio composition towards less risky exposures. 
Indeed,  observed  changes  in  portfolio  composition,  which  indicate  a  shift  from 
portfolios  with  high  PDs  (corporate  portfolio)  to  portfolios  with  lower  PDs 
(sovereign portfolio), partially explain why the increase in RWA discussed above is 
smaller than increases in exposure amounts (see Chart 1 in the accompanying Staff 
Working  Document).  In  addition,  the  outcome  may  be  driven  by  the  time  lag 
inherent in PD revision process.21 

Furthermore, regression analyses of the impact of the business cycle on various bank 
portfolio segments showed that the coefficient of the business cycle22 is positive for 
the  corporate  and  retail  exposure  classes  and  negative  for  sovereign  exposures23, 
which  seems  to  be  in  line  with  the  finding  mentioned  above  that  banks  have 
readjusted  their  portfolio  composition  towards  exposures  that  were  presumed  to  be 
less capital intensive. 

The multi-country analysis of the supervisory data as of December 2008 concluded 
that macroeconomic conditions had an impact on the risk parameters, and on PDs in 
particular.24  However,  until  the  end  of  2008  macroeconomic  conditions  did  not 
significantly  affect  the  MRC  at  the  level  of  individual  institutions.  This  somewhat 
counter-intuitive finding is largely due to the portfolio readjustment effects discussed 
above.  

IMPACT OF CAPITAL REQUIREMENTS ON BANK LENDING ACTIVITY 

In order for regulatory capital requirements to have an effect on bank lending, they 
must  be  binding  on  the  level  of  capital  that  banks  hold.  Regulatory  requirements, 
however, may not be the only relevant factor for banks in deciding how much capital 
to hold. Economic capital models, expectations of other market participants and, in 

MRC  effectively  summarises  the  numerator  and  the  denominator  of  the  regulatory  capital  ratio.  It 
measures the capital required to cover (i) 8% of RWA; (ii) differences between total eligible provisions 
and the total expected loss amount; and (iii) other deductions. 
PD are estimated using the P&L data, which are affected by the business cycle with some delay and are 
released with a further time lag. For example, if revenues of a firm start decreasing at the beginning of a 
year, they are reflected in its year-end financial statements that are published only some months into the 
following year and might be incorporated in the rating systems some additional months later. 
Represented by lagged output gap and measured as a difference between actual and potential GDP 
Only for the corporate portfolio the coefficient is statistically significant (at 1%) 
Regression analyses on the relationship between the change in individual risk input parameters and the 
business cycle, conducted by the ECB, found that PDs of corporate and retail portfolios tend to increase 
more strongly in countries with low business activity, measured by the output gap lagged by one period. 
Similar regressions with respect to LGDs produced coefficients for all portfolios that are negative but 
statistically insignificant. This may indicate that the LGD values recorded in banks' internal models are 
somewhat  stickier  than  PDs  and  thus  may  react  less  immediately  to  changes  in  the  macroeconomic 
environment.  Therefore,  a  longer  sample  period  might  be  needed  to  provide  firm  evidence  of  the 
expected strong negative relationship between economic activity and LGDs. An additional explanation 
for  failing  to  find  any  link  between  LGDs  and  the  business  cycle  may  be  given  by  regulatory 
requirements that stipulate the use of stress LGDs. 

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particular,  requirements  of  credit  rating  agencies  (CRAs),  may  force  banks  to 
increase  their  capital  levels  even  when  they  comply  with  their  regulatory 
requirements. 

Results  of  the  questionnaires  conducted  by  the  ECB  show  that  CRAs  play  a 
predominant role in the determination of the desired capital level, and that this factor 
is  possibly  even  more  relevant  than  the  regulatory  capital  requirements  for  large, 
internationally  active  banks.  This  suggests  that  the  changes  in  the  level  of  desired 
capital and the related effects on banks’ lending may primarily be influenced by the 
objective of individual institutions to receive specific ratings from CRAs. Similarly, 
for large banks, economic capital models could potentially be more important factors 
in  capital  allocation  than  regulatory  requirements.25  The  recent  financial  crisis 
highlighted  the  significance  of  market  participants'  expectations  in  setting  bank 
capital  levels.  It  appears  that  the  pressure  on  banks  to  refrain  from  drawing  down 
capital buffers was driven by the concerns of market participants about adequacy of 
the  quality  and  the  level  of  capital  in  the  stress  period,  rather  than  the  cyclical 
volatility of the MRC.  

In order for regulatory capital requirements to have an effect on bank lending, bank 
lending  should  be  driven  by  loan  supply  rather  than  demand.  Furthermore,  capital 
requirements  should  also  represent  a  major  determinant  of  lending  cyclicality  in 
comparison  with  other  loan  supply  and  demand  factors.  Demand-side  factors 
influencing  bank  loan  growth  include  consumer  expectations,  inflation  and 
unemployment levels.  

The ECB's Bank Lending Survey (BLS)26 suggests that the CRD had some impact on 
banks’  lending  policies.  Banks  surveyed  reported  that  the  impact  of  the  CRD  on 
credit  standards  was  more  pronounced  with  respect  to  corporate  loans  (both  SMEs 
and large firms) compared to household loans (see Chart 2). The importance of the 
CRD,  however,  varied  substantially  across  banks:  while  at  the  aggregate  euro  area 
level  the  large  majority  of  banks  reported  that  the  CRD  so  far  had  basically  no 
impact on their credit standards, a substantial dispersion across countries is notable 
(see Chart 3). Whereas in some countries banks reported that the CRD had little or 
no impact on their policies with respect to lending to enterprises, up to 80% of the 
banks in other countries reported that the CRD had led to a net tightening of credit 
standards. Similarly, while contributing to a net tightening of credit standards applied 
on loans to households in most countries, the CRD was reported to have led to a net 
easing in a few countries.  

The  questionnaire  conducted  by  the  Commission  surveyed  banks  about  the  factors 
that  had  constrained  their  lending  from  October  2008  to  April  2009  (see  Chart  4). 
While 47% of respondents mentioned changes in regulatory capital, this factor was 
preceded  by  general  economic  and/or  industry-specific  outlook  (95%),  borrower-
specific  outlook  (79%)  and  availability  of  collateral  for  new  business  (63%). 

Banks'  answers  to  the  questionnaire  conducted  by  the  Commission,  however,  indicate  that  regulatory 
capital requirements are the most important approach to determine target capital level - for both the SA 
and the IRB banks 
BLS of July 2009, covering a sample of more than 100 euro area banks, included questions about the 
impact of the CRD on the banks’ lending policies (measured by their credit standards) during the period 
from Q1 2008 to Q2 2009 

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Similarly,  recent  studies  of  the  ECB  covering  the  euro  area  suggest  that  banks’ 
capital position (in a broad sense, going beyond MRC) had an impact on the supply 
of loans to households and enterprises over the last two years, albeit less pronounced 
than the impact of factors under the 'perception of risk' category (see Charts 5 and 6). 

Recent events have shown that certain weaknesses in regulatory capital requirements 
may also have pro-cyclical implications. In the buoyant years preceding the turmoil, 
many  large  banks  aggressively  increased  leverage  thus  amplifying  risks,  including 
risks  held  in  the  trading  book,  that  were  not  adequately  captured  by  regulatory 
capital.  The  crisis  prompted  concerns  over  banks'  capital  adequacy  and  in  order  to 
achieve  higher  capital  ratios  deemed  appropriate  by  the  market  participants,  many 
banks have had to quickly de-leverage their operations and raise additional capital in 
a difficult market environment, adding to the stress. Up to 50% of the banks reported 
to the ECB that the financial turmoil had negative implications on both their capital 
position  (reflecting  substantial  write-downs  and  losses  on  trading  books27  and 
disruptions of access to wholesale funding) and lending decisions (see Chart 7).  

Nevertheless, the ECB analysis concluded that the recent decline in loan growth was 
to a considerable extent influenced by declining loan demand. The long-run trends of 
aggregate loan growth and economic activity in the euro area (see Chart 8) illustrate 
that  historically  lending  has  tended  to  move  pro-cyclically  with  the  business  cycle. 
Notwithstanding  the  pressures  experienced  by  the  euro  area  banks  during  the 
financial  turmoil  and  the  transition  to  the  CRD,  loan  growth  at  the  aggregate  level 
recently moved more-or-less in line with historical patterns. Household loan growth 
declined broadly in parallel with the slowdown in economic activity, whereas growth 
of  loans  to  non-financial  corporations  only  started  declining  with  a  lag,  which  is 
consistent with what has been observed in the past. 

Overall, the extent to which the introduction of the CRD has led to more pro-
cyclical bank lending is still difficult to assess. Although the evidence presented 
in this section does point to some potential links between CRD and bank lending 
behaviour,  analysis  over  a  longer  period  is  needed  to  draw  more  robust 
conclusions.  Moreover,  it  is  important  to  stress  that  as  the  implementation  of 
the  Basel  II  framework  coincided  with  the  outbreak  of  the  financial  crisis, 
disentangling the effects of these two events is particularly difficult. 

IMPACT OF CREDIT AVAILABILITY ON ECONOMIC CYCLE 

The final step of the analysis concerns the extent to which CRD-induced changes in 
bank loan supply have an impact on the economic cycle.  

For the CRD to have amplifying effects on the real economy, a significant number of 
borrowers must be 'bank-dependent', meaning that they cannot substitute bank loans 
by other means of finance. The ECB data shows that in terms of new business loans 
granted to non-financial corporations (see Chart 9) small-sized loans peaked in mid-
2008 but have since declined by around 15%, while large-sized loans peaked in early 
2009  and  declined  by  around  10%  by  September  2009.  While  this  indicates  that 

27 

After trading account profit (including unrealised gains and losses) of €82 billion in 2007, a sample of 
105 EU banks incurred trading account loss of €94  billion in 2008; sources: Orbis, Bloomberg 

EN 

9 

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26. 

27. 

28. 

28 

29 

30 

31 

lending to SMEs has been more strongly affected by the economic downturn, lending 
to large corporations has also declined in recent months. However, volumes of small-
sized  loans  declined  more  than  those  of  large-sized  loans,  and  the  spreads  between 
the rates on small-sized and large-sized loans have increased since the beginning of 
2008 (see Chart 10).  

However,  according  to  a  recent  survey28  of  European  SMEs,  most  of  them  appear 
still to have access to bank financing in spite of deterioration in terms and conditions 
of borrowing. The results of the survey showed that applications for bank financing 
were mostly successful: 60% of the euro area SMEs reported that in the first half of 
2009  they  had  received  the  full  amount  of  loans  applied  for  and  a  further  17% 
received part of the amount; only 12%29 of the applications were rejected (see Chart 
11).  Comparable  estimates  were  obtained  by  the  Commission  in  a  separate 
questionnaire to EU businesses on availability of bank credit.30 

In  terms  of  extent  to  which  corporate  borrowers  are  able  to  cushion  the  impact  of 
restrained  lending  in  the  context  of  the  economic  downturn,  evidence  shows  that 
market-based  financing,  such  as  equity  and  debt  securities  issuance,  has  somewhat 
mitigated  the  decline  in  long-term  bank  financing  observed  since  late  2008  (see 
Chart 12). As regards SMEs, while the majority of those that had applied for trade 
credit  or  other  external  financing  in  the  first  half  of  2009  received  the  full  amount 
requested,  some  businesses  reported  to  have  not  been  able  to  obtain  any  funding 
from these alternative sources (13 % and 15%, respectively, see Chart 11). 

Notwithstanding  the  indications  of  ongoing  substitution  between  market-based 
and  bank-based  financing  in  recent  months,  the  predominant  role  of  banks  in 
providing  funds  for  spending  and  investment  should  not  be  underestimated, 
especially  given  the  fact  that  obtaining  the  necessary  funding  from  alternative 
sources  has  been  burdensome  for  some,  particularly  smaller,  businesses. 
Moreover, there is recent empirical evidence that shocks to loan supply have the 
potential to affect economic activity in the predominantly bank-based euro area 
financial system.31 

A  survey  conducted  by  the  ECB  in  cooperation  with  the  Commission  between  June  17  and  July  23, 
2009, covering 6,000 SMEs and large firms in the euro area 
The larger the firms, the more successful they were in obtaining a loan as only 5% of large firms had 
their loan applications rejected 
Feedback  from  429  EU/EEA  businesses  showed  that  in  the  period  from  October  2008  to  September 
2009 13% of businesses who applied for bank credit were not successful in obtaining any funding in the 
form of bank credit, and this percentage was higher for SMEs (15%) than for large enterprises (5%). 
The  replies  also  showed  that  for  a  sub-sample  of  businesses  who  said  that  they  had  been  adversely 
affected by availability of bank credit, obtaining the funds needed from other sources was more difficult 
to SMEs relative to large enterprises. 
Cappiello  et  al.  (2009)  provide  empirical  evidence  on  the  existence  of  bank  lending  channel  of 
monetary policy transmission in the euro area. The authors find that changes in the supply of credit, in 
terms of both volumes and credit standards applied to loans to enterprises, have significant effects on 
real  economic  activity.  Therefore,  bank  balance  sheet  constraints,  such  as  binding  regulatory  capital 
requirements  -  to  the  extent  that  they  lead  banks  to  reduce  their  loan  supply  –  may  have  negative 
repercussions on real economic growth.  
Ciccarelli et al. (2009) use a panel VAR for the euro area with GDP, prices, short-term interest rates, 
loan  demand  and  loan  supply  conditions.  Using  impulse  response  functions,  the  authors  find  that  a 
tightening of credit standards lead to a significant decline in real GDP growth. Hence, to the extent that 

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6. 

29. 

30. 

31. 

32. 

RATIONALE UNDERLYING THE CALCULATION OF CAPITAL REQUIREMENTS 

In the context of the G20 decisions, on February 26 2010 the Commission launched a 
public  consultation  on  a  package  of  options  to  amend  the  CRD  in  the  areas  of 
liquidity  and  counterparty  credit  risk  management,  definition  of  capital,  leverage 
ratio,  counter-cyclical  measures,  systemically  important  financial  institutions  and 
single  rule  book.  It  would  go  beyond  the  the  scope  of  this  report  to  present  the 
assessment on these potential requirements.32 

However,  in  the  context  of  pro-cyclicality  two  issues  have  received  particular 
attention in the wake of the crisis: the effect of securitisation downgrades and loans 
to SMEs. In particular, there have been concerns about the negative effects for SMEs 
if the capital framework resulted in reduced access to credit and higher interest rates. 

The  asset  correlation  could  be  decribed  as  the  dependence  of  the  asset  value  of  a 
borrower on the general state of the economy – all borrowers are linked to each other 
by this single risk factor and therefore they tend to present similar evolution. These 
correlations are asset class dependent, because different borrowers and asset classes 
show  different  degrees  of  dependency  on  the  overall  economy,  and  they  also 
influence the risk weights. An example of low correlation is the retail portfolio, since 
defaults of retail customers tend to be more idiosyncratic and less dependent on the 
economic  cycle  than  corporate  defaults.  As  a  consequence,  the  loss  curve  is 
relatively  flat,  and  the  capital  requirements  are  less  dependent  on  the  state  of  the 
economy.  The  current  CRD  framework  recognises  the  importance  of  SMEs  to  the 
European  economy  and  attributes  loans  to  SMEs  with  a  credit  volume  of  less  than 
one million euro to the asset class for retail loans. Consequently, capital requirements 
for  such  loans  are  less  affected  by  the  economic  cycle  and  offer  considerable 
advantages for SMEs compared to Basel I. 

The  MRC  for  securitisations  is  also  important.  These  are  primarily  based  on  the 
external rating given by a CRA.33 External ratings provide a relatively standardised, 
easy-to-understand  and  independent  measure  that  was  already  extensively  used  by 
the market before being incorporated in the Basel II framework.34 Each credit rating 
for  a  securitisation  tranche  is  linked  to  a  specific  risk-weighted  capital  charge  (see 
Chart  13).  The  capital  requirements  increase  sharply  when  a  securitisation  is  rated 
lower  than  BBB-  and  anything  rated  lower  than  B+  must  be  fully  backed  by 
regulatory capital because: 

–  for  subordinated  tranches,  the  losses  after  default  may  be  far  greater  for 
securitisation positions than for ordinary corporate loans that have a similar PD; 
and 

32 
33 

34 

the CRD affects bank credit standards, this finding suggests that eventually economic activity would be 
also affected by the CRD. 
http://ec.europa.eu/internal_market/bank/regcapital/index_en.htm  
Banking regulators have not been in favour of allowing banks to utilise their own credit risk models to 
derive capital requirements, due to the uncertainty and lack of data with respect to asset correlations. As 
recent experience has shown, banks’ internal models have not performed particularly well 
Directive  2009/111/EC  which  amended  the  CRD  requires  full  due  diligence  on  the  part  of  banks, 
including 5% retention of securitised assets, while the governance of rating agencies will be addressed 
by the Regulation on Rating Agencies 

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–  regulators  introduced  an  incentive  to  discourage  banks  from  investing  in  lower-

rated risky, subordinated tranches.35 

During  the  financial  crisis  securitisation  tranches  were  severely  downgraded  by 
CRAs.  Not  only  subordinated  but  also  senior,  originally  highly-rated  tranches 
received  higher  capital  charges.  As  of  June  2009,  capital  charges  for  securitisation 
positions  on  average  constituted  6%  of  the  MRC  for  Group  1  banks  and  3.2%  for 
Group  2  banks.36  More  differentiation  and  granularity  in  the  capital  requirements 
could address this problem and securitisation capital charges are therefore currently 
under review. 

To evaluate the overall effects of potential amendments to the Basel II framework on 
capital  levels,  the  Basel  Committee  will  conduct  a  Quantitative  Impact  Study.  In 
order to assess their impact on European banks and possible effects on bank lending, 
the  Commission  has  invited  the  CEBS  to  carry  out  a  parallel  exercise  for  the  EU. 
Importantly,  the  CEBS'  analysis  will  include  small  banks  whose  lending  activities 
may be of particular relevance to SMEs. 

MEASURES TO ADDRESS PRO-CYCLICALITY 

Since it is not possible to achieve greater risk sensitivity across institutions at a given 
point  in  time  without  introducing  a  certain  degree  of  cyclicality  in  the  MRC  over 
time, some degree of pro-cyclicality may be unavoidable. The CRD responded to this 
trade-off  by  introducing  a  number  of  safeguards  to  limit  potential  pro-cyclical 
effects,  including  stress  testing  (as  part  of  Pillar  2),  transitional  floors  to  capital 
levels, more favourable risk-weights for exposures to less cyclical borrowers (SMEs) 
and inputs to the capital calculation to be based on long data histories (for PDs) and 
downturn estimates (for LGDs). 

However, the recent crisis has shown that market participants expect a rise in capital 
levels  where  they  do  not  believe  that  an  institution  is  well  placed  to  absorb  losses. 
Enhanced  counter-cyclical  measures  within  the  regulatory  framework  for  capital 
requirements  could  help  to  restore  confidence  in  banks'  balance  sheets,  and  thus 
reduce the likelihood that banks will have to increase capital requirements or sharply 
de-leverage  their  credit  portfolios  to  meet  market  participants'  expectations.  The 
Commission  agrees  with  international  institutions  such  as  the  FSB  and  the  Basel 
Committee that additional measures are necessary to avoid excessive pro-cyclicality.  

33. 

7. 

34. 

35. 

35 

36 

However there are important factors, that can reduce the impact of the increases in capital requirements 
if ratings deteriorate, because: (i) rating downgrades were accompanied by accounting valuation losses. 
As EU banking rules allow banks to off-set accounting valuation losses against the capital requirement, 
the  effect  of  rating  downgrades  will  be  far  lower  for  those  banks  that adopted  conservative  valuation 
policies for their securitisation positions; (ii) banks that have benefited from government guarantees for 
their  securitisation  positions  or  that  have  sold  them  into  the  markets  or  to  specialised  government 
sponsored vehicles ("bad banks"), will also have had full or partial relief from the increases in capital 
requirements. 
At the end of June 2008, these averages stood at 2.9% for Group 1 and 4.5% for Group 2 

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7.1. 

Capital buffers and provisions 

36. 

37. 

38. 

39. 

40. 

37 

The Commission is considering the introduction of capital buffers and / or through-
the-cycle  provisions.  Both  types  of  measures  aim  to  mitigate  pro-cyclicality. 
Dynamic  provisioning  deals  with  provisioning  for  "expected"  credit  losses  on 
exposures and buffers deal with "unexpected losses". 

Furthermore,  there  are  two  types  of  counter-cyclical  measures  –  those  that  are 
applied on the basis of bank specific risk characteristics (micro level) and those that 
are  based  on  one  or  more  macro-variables,  reflecting  the  broader  systemic  risk 
(macro level). Dynamic provisioning, capital conservation buffers and a proposal of 
CEBS to smoothen the cyclicality of MRC (see below) are bank specific measures – 
they look at specific risks associated with the individual bank. 

Provisions  for  loan  losses  reduce  reported  net  income  in  the  period  in  which  the 
provision  is  recognised  and  decrease  the  carrying  value  of  the  loans.  Accounting 
standards currently use the "incurred loss model", allowing for recognition of losses 
only  if  they  have  been  incurred  at  the  balance  sheet  date.  Current  standards  do  not 
permit  credit  losses  based  on  events  that  are  expected  to  occur  in  the  future  to  be 
included in provisions.37 

In  practice,  therefore,  for  a  long-term  loan  portfolio  initiated  during  an  economic 
upturn, there may be no incurred loss event and no provisions would be set up under 
loans.  Through-the-cycle 
the  current  IFRS  for  credit 
provisioning  ("dynamic  provisioning")  and  the  IASB  proposal  would  require  banks 
to  set  aside  provisions  for  expected  credit  losses.  As  a  result,  during  economic 
upswings  banks  would  build  up  provisions  that  could  act  as  a  buffer  during  a 
downturn. 

losses  on 

individual 

Several  options  are  currently  considered  to  address  effectively  the  pro-cyclicality 
issue, improving provisioning rules being one of them. In this context, more forward-
looking solutions, such as dynamic provisioning, have some advantages so that banks 
reflect  expected  losses  sooner.  The  IASB  is  already  working  on  amending  current 

The  IASB  has  undertaken  a  comprehensive  review  of  the  IAS  39  "financial  instruments"  including 
credit  loss  provisioning,  and  in  November  2009  issued  a  separate  Exposure  Draft  (ED).  The  ED 
contains  five  high  level  measurement  principles  (Expected  Cash  Flow  Model,  ECF)  that  reporting 
entities  should  use  in  combination  with  the  principles-based  application  guidance  to  determine  the 
amortised cost. Under the proposed method banks would: 
a)  initially  estimate  the  expected  cash  flows  for  the  (remaining)  life  of  the  financial  instrument 
including the expected credit losses (taking into account the collateral); 
b) calculate the “effective interest rate” (internal rate of return) on the basis of the expected cash flows. 
The  effective  interest  rate  would  be  lower  than  the  contractual  interest  rate  because  estimated  credit 
losses would be taken into account; 
c) at each reporting date review the initial cash flow and credit loss expectations and revise them when 
necessary. 
The  ECF  approach  could  improve  provisioning  for  credit  risks  compared  to  the  current  incurred  loss 
model  of  IAS  39  because  it  would  no  longer  require  a  trigger  event  and  would  allow  an  earlier 
recognition  of  credit  losses.  The  ECF  approach  would  also  achieve  a  better  matching  of  contractual 
interest income with expected losses. However, the ED provides limited guidance on the use of data and 
models. The ED basically requires point-in-time estimates for cash flows and expected credit losses. As 
well  as  the  Basle  Committee  and other  stakeholders,  the Commission  is  assessing  the IASB proposal 
and will contribute to its improvement in accordance with the objectives set out by the G20. 

EN 

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41. 

42. 

43. 

accounting  rules  on  provisioning.  The  Basel  Committee  is  planning  to  provide  a 
thorough contribution which would limit pro-cyclicality and make the IASB's model 
more operational.  

As far as capital buffers are concerned, two complementary elements are identified. 
The first element stipulates a fixed target buffer (capital conservation buffer) over the 
regulatory  capital  minimum  that  is  available  to  absorb  losses  in  "stressed"  periods. 
Banks  would  be  expected  to  build  up  such  capital  in  good  times.  Banks  that  are 
below the fixed target would face constraints on capital distributions (i.e., dividend 
payments, share buybacks) until fixed target buffers are reached. This would ensure 
that the banking sector builds up capital buffers when it has the earnings capacity to 
do  so  and  uses  those  buffers  in  periods  of  stress.  Requiring  capital  to  rise  during 
periods  of  strong  earnings  could  help  dampen  excessive  banking  sector  credit 
extension and leverage. 

The second element stipulates a counter-cyclical capital buffer. It would be designed 
to  achieve  the  broader  macro-prudential  goal  of  protecting  the  banking  sector  from 
periods  of  excessive  credit  growth  and  support  bank  lending  in  the  economic 
downturn.  The  target  level  of  counter-cyclical  capital  buffer  would  vary  over  time 
and would be set as a function of one or more macro variables chosen to act as an 
indicator  of  build-up  of  risks  at  a  macro  level.  Deviation  of  the  macro  variable(s) 
from  the  long-term  average  would  indicate  periods  of  build-up  of  macro  risks, 
leading to the extension of the range of capital conservation buffer. 

In  order  to  address  pro-cyclicality  on  a  macro  prudential  level,  the  Commission 
acknowledges the option of a time-variant capital buffer. As such a measure would 
include  an  overall  economic,  monetary  and  macro-prudential  assessment,  the 
Commission  will,  together  with  the  ECB,  assess  possible  ways  to  integrate  this 
measure into the new architecture for supervision.  

7.2. 

Smoothening of the MRC 

44. 

The CEBS has proposed to use the Pillar 2 process to adjust for the compression of 
PD estimates during benign credit conditions. In practice, the methodology is based 
on the application of an adjustment which reflects the gap between current PDs and 
PDs corresponding to either recessions or long-term average. Designed in this way, 
the  size  of  the  adjustment  decreases  in  a  recession  and  increases  in  expansionary 
phases  and  the  buffer  would  be  calculated  accordingly.  The  buffer  would  thus  be 
able to absorb cyclical fluctuations of MRC, reducing pro-cyclicality. 

7.3. 

Leverage 

45. 

Leverage  within  the  financial  system  grew  significantly  in  the  run  up  to  the  recent 
financial crisis, both within the regulated banking sector and unregulated sectors, in 
entities such as hedge funds and private equity firms. While increased leverage can 
have  the  effect  of  increasing  returns  during  good  times,  it  also  exacerbates  losses 
during a downturn. Furthermore, the de-leveraging process that occurred across the 
financial system caused further damaging effects for financial markets and the wider 
economy. 

EN 

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46. 

The  G20  declaration  of  April  2,  200938  stated  that  “risk-based  capital  requirements 
should be supplemented with a simple, transparent, non-risk based measure which is 
internationally comparable, properly takes into account off-balance sheet exposures, 
and  can  help  contain  the  build-up  of  leverage  in  the  banking  system".  In  its  public 
consultation the Basel Committee outlined the contours of a leverage ratio that would 
work as a supplementary measure to the Basel II risk-based framework with a view 
to migrating to  a Pillar  1  treatment  based  on appropriate review and calibration. In 
line with the Basel Committee, the Commission is considering the introduction of a 
leverage ratio with the aim of achieving the following objectives: 

–  limit the build-up of leverage in the banking sector, thus helping to mitigate the 
risk  of  the  destabilising  deleveraging  processes  which  can  damage  the  financial 
system and the economy; and 

–  introduce  additional  safeguards  against  model  risk  and  measurement  error  by 
supplementing  the  risk-based  measure  with  a  simple,  transparent,  independent 
measure of risk that is based on gross exposures. 

47. 

It  is  desirable  that  the  leverage  ratio  is  harmonised  internationally  before  it  is 
implemented,  and  fully  adjusted  for  any  remaining  differences  in  accounting.  The 
ratio would be calibrated so that it serves as a credible supplementary measure to the 
risk-based requirements, taking into account the forthcoming changes to the Basel II 
framework. 

7.4.  Measures already adopted by the Commission 

48. 

49. 

50. 

During  the  financial  boom  years,  the  design  of  incentive  schemes  for  decision-
making staff within financial firms fostered pro-cyclicality by stimulating excessive 
risk-taking through a focus on short-term profitability without adequately capturing 
and adjusting for risk or the long-term performance.39 

In order to address this detrimental effect of poorly designed remuneration structures, 
the  Commission  has  proposed  to  supplement  the  requirements  of  the  CRD  by  an 
express  obligation  for  credit  institutions  and  investment  firms  to  establish  and 
maintain,  for  those  categories  of  staff  whose  professional  activities  have  a  material 
impact  on  their  risk  profile,  remuneration  policies  and  practices  that  are  consistent 
with effective risk management.40 

To  improve  the  adequacy  of  bank  capital  requirements,  the  Commission  has  also 
proposed amendments to the CRD to increase regulatory capital requirements for the 
trading book activities and re-securitizations held in the banking book.41 During the 
financial crisis, the weaknesses in the MRC in these areas led to additional stress on 
banks' capital positions which, in turn, probably contributed to the tightening of bank 
lending standards. 

38 
39 
40 
41 

G-20 (2009) 
See para 5 for more on inappropriate responses of market participants to changes economic conditions 
COM (2009) 362 final 
Ibid 

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51. 

In  2009  the  Commission  also  proposed  to  set  up  a  European  Systemic  Risk  Board 
(ESRB)42  to  oversee  the  stability  of  the  financial  system  as  a  whole.  The  ESRB,  if 
established  in  accordance  with  that  proposal,  will  identify  systemic  risks  at  the 
European level and issue risk warnings. Adding a robust macro-prudential overlay to 
the  current  micro-prudential  approach  should  help  to  address  sources  of  pro-
cyclicality linked to limitations in the risk measurement and inappropriate responses 
of  market  participants  to  risk.43  This  should  support  the  timely  identification  of 
cycles  and  the build-up of  risks in the system which, when accompanied by robust 
links  to  supervisors  and  policymakers,  could  enable  action  to  be  taken  earlier  to 
avoid excessive volatility and pro-cyclicality in a downturn.  

7.5. 

Conclusions 

52. 

53. 

54. 

It has to be emphasised that the analysis provided is indicative given the fact that the 
rules of CRD II were only adopted in 2009. 

The  Commission  notes  that  many  international  institutions  and  committees  have 
emphasised  the  importance  of  introducing  counter-cyclical  measures  in  the 
prudential framework in order to reduce excessive pro-cyclicality within the financial 
system. In parallel with work going on in the Basel Committee, the Commission will 
in particular examine the options which address systemic risk and pro-cyclicality in 
the most effective way. The Commission believes that these measures should be able 
to limit excessive risk-taking in times of economic growth but also be designed in a 
way  that  they  can  be  drawn  down  during  economic  downturns  to  increase  the 
resilience of the banking sector and to support the credit flow into the economy. 

The  Commission  recalls  the  conclusions  of  the  Ecofin  Council44  calling  for  "the 
introduction  of  forward  looking  provisioning,  which  consists  in  constituting 
provisions deducted from profits in good times for expected losses on loan portfolios, 
and which would contribute to limiting pro-cyclicality". The Commission also recalls 
the  G20  recommendation  calling  on  “the  accounting  standard  setters  to  work 
urgently  with  supervisors  and  regulators  to  improve  standards  on  valuation  and 
provisioning  and  achieve  a  single  set  of  high-quality  global  accounting  standards”. 
The  Commission  will  take  into  account  the  ongoing  work  by  the  international 
accounting standard setter (IASB) and prudential supervisors (in particular, the Basel 
Committee) when considering a legislative proposal. 

42 
43 
44 

See COM (2009) 499 final 
See para 5 for more on these issues 
ECOFIN (2009) 

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8. 

REFERENCES 

BIS (2008), “Addressing financial system procyclicality: a possible framework”, Note for the 
FSF  Working  Group  on  Market  and  Institutional  Resilience,  September  2008,  available  at 
http://www.financialstabilityboard.org/publications/r_0904e.pdf?noframes=1  

Borio,  C.,  C.  Furfine,  and  P.  Lowe  (2001),  "Procyclicality  of  the  financial  system  and 
financial stability: issues and policy options", BIS Paper No 1 

Cappiello, L., A. Kadareja, C. Kok Sørensen and M. Protopapa (2009), ”Do bank loans and 
credit standards have an effect on output? A panel approach for the euro area”, ECB Working 
Paper (forthcoming) 

Ciccarelli, M., A. Maddaloni and J.-L. Peydró (2009), “Trusting the Bankers: a New Look at 
the  Credit  Channel  of  Monetary  Transmission”,  paper  presented  at  the  2009  CREDIT 
Conference on Credit Risk, Financial Crises, and the Macroeconomy, Venice 

COM (2009) 362 final, Proposal for a directive of the European Parliament and of the Council 
amending  Directives  2006/48/EC  and  2006/49/EC  as  regards  capital  requirements  for  the 
trading book and for re-securitisations, and the supervisory review of remuneration policies, 
available 
at 
http://ec.europa.eu/internal_market/bank/docs/regcapital/com2009/Leg_Proposal_Adopted_1
307.pdf  

COM  (2009)  499  final,  Proposal  for  a  regulation  of  the  European  Parliament  and  of  the 
Council on Community macro prudential oversight of the financial system and establishing a 
at 
European 
http://ec.europa.eu/internal_market/finances/docs/committees/supervision/20090923/com200
9_499_en.pdf  

September 

Systemic 

available 

Board, 

2009, 

Risk 

23 

ECOFIN  (2009),  "Council  conclusions  on  pro-cyclicality",  2954th  Economic  and  Financial 
Affairs, 
at 
July 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/109050.pdf  

Brussels, 

available 

2009, 

7 

G-20  (2009),  "Declaration  on  strengthening  the  financial  system",  London,  2  April  2009, 
available 
http://www.g20.org/Documents/Fin_Deps_Fin_Reg_Annex_020409_-
at 
_1615_final.pdf  

Masschelein, N. (2007), "Monitoring pro-cyclicality under the capital requirements directive: 
preliminary concepts for developing a framework", NBB Working Paper Document No. 120 

EN 

17 

   EN