Capital, Trust and Competitiveness in the Banking Sector

This paper provides an analysis of the Basle Committee. It argues that the whole process of capital regulation led to an unintentional erosion of capital and, ultimately, trust in the Continental European banking industry. Thus, the Basle process effectively has been successful in eliminating the competitive advantage of well capitalized banking systems of the early 1980s, especially those of Japan and Germany.

This is a surprising development since well capitalized banks historically did, and according to recent studies still do enjoy competitive advantages in their respective markets. Moreover, resiliency, stability and trust of depositors is largely based on stable balance sheets.

By way of concluding the paper argues in favor of strengthening bank balance sheets and in favor of rewarding solid financing strategies. Quantitative easing and expansive monetary policies effectively subsidize less subsidized competitors and reduce the taste for resilient balance sheets.