Highlights

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Bank capital requirements and accounting rules were debated by the EU Economic and Financial Affairs Council (Ecofin) at its first meeting under Swedish presidency on 7 July. Ministers examined means to reduce pro-cyclical effects in the financial sector in the light of a report from the Economic and Financial Committee (EFC).

The capital requirements set for credit institutions and investment firms are meant to ensure that these entities can weather hard times. These conditions are aimed at protecting depositors and ensuring the stability of the financial system. Capital requirements tend to fluctuate with the business cycle, falling in an upturn and rising in a downturn. This phenomenon, known as pro-cyclicality, is likely to have increased in recent years, the EFC document states.

The Council welcomed the report, which names four main responses for reducing pro-cyclical effects of financial regulation:

• monitoring system-wide risks
• building counter-cyclical buffers through capital and provisions
• improving accounting rules
• establishing a sound framework for remuneration schemes.

The Ecofin declared that financial firms' pay schemes have added to pro-cyclicality, due to inappropriate incentives, short-termism and inadequate capture of risk.

The global slowdown has highlighted the need to tackle the sources of pro-cyclicality. Recent G-20 summits urged international bodies to fight pro-cyclicality by mitigating it in regulatory policy and reviewing how valuation and leverage, bank capital, compensation schemes and provisioning practices may amplify cyclical trends. These goals were underscored by the June European Council.

More information:
Council Conclusions (pdf) 
Council webcast of press conference