Europe Goes ‘Countercyclical’: A Legal Assessment of the New Countercyclical Dimension of the CRR/CRD IV Package

One of the most innovative features of Basel III was the introduction of a new ‘countercyclical’ regulatory dimension for banks. In 2013, this dimension was operationalised in the European prudential framework included in the CRR/CRD IV package. Although the uniform implementation of these rules has been welcomed by the European legislator as creating a level playing field for banks and investment firms, this legal analysis reveals the existence of serious competitive disadvantages for small local and regional banks. While the largest entities are incentivised to exploit the arbitrage opportunities hidden in the CRR/CRD IV countercyclical provisions, such opportunities are not available to smaller entities. Thus, the unintended result of the new prudential framework seems to be not only a re-sizing of the banking balance sheets, but also a re-composition of the banking structures. In this paper, one of the building blocks of the Legal Theory of Finance, i.e., the construction of finance as a legal by-product is taken as a point of departure to show how the adoption of the new countercyclical rules paves the way for a new consolidation wave in the banking industry.