The false trade-off defining Germany’s CRD transposition (Bundestag Finance Committee hearing)

At a public hearing of the Bundestag’s Finance Committee on 12 January 2026, Julia Symon, Head of Research and Advocacy at Finance Watch, contributed to discussions on the national transposition of the EU Capital Requirements Directive (CRD). Finance watch warned against weakening supervisory and ESG requirements, in a hearing dominated by banking sector calls to reduce what were described as regulatory burdens. 

Video of the hearing available here

What is being decided through CRD transposition

The Capital Requirements Directive is a cornerstone of EU banking regulation. While some EU rules set how much capital banks must have to withstand financial shocks, the CRD determines how those rules are applied and enforced in practice, as well as sets principle-based provisions for the management of the risks that are not sufficiently covered by the minimum capital requirements (so-called Pillar 1 requirements). It defines how banks are supervised on a day-to-day basis, including what risks they must identify and manage, what information supervisors can demand, and when supervisors can require banks to maintain additional capital beyond the minimum.

In this way, the CRD has a decisive influence on how much capital banks actually operate with, and therefore on how able they are to withstand losses when faced with shocks and economic downturns.

The national transposition of this directive matters. Member States have discretion in interpreting and enforcing provisions. At this stage, national-level political priorities have the power to mould the real-world application of EU law. For example, policymakers could decide to de facto ignore the financial risks posed by climate change. Conversely, they could require banks to produce concrete and coherent plans showing how they manage those risks.

Competitiveness, simplification and the push to weaken supervision

In Germany, these arguments have emerged in the context of the CRD transposition. Political priorities to ‘reduce administrative burdens’ and ‘support competitiveness’ dominate the debate. At the Bundestag, these now familiar lines are propagated by banking associations, repeating claims that easing ESG-related and other prudential requirements through transposition would “free up capital” for the real economy. And that lighter supervision reduces regulatory pressure on banks’ balance sheets, allowing them to expand lending to businesses and households. The proportionality argument is invoked in many instances to justify why smaller and less complex banks should be exempted altogether from certain provisions, ignoring the fact that it is precisely smaller banks that exhibit concentrations in certain risk segments, as well as often have less capability to deal with complex risks. 

Finance Watch challenged this logic

1. First, lending activity is not constrained by regulatory capital. The Bundesbank’s Financial Stability Report shows capitalisation of German banks is solid, and capital ratios are well above minimum requirements. At the same time, the Bundesbank notes persistent weakness in the corporate sector. Firms may be reluctant to borrow because of a poor outlook or economic uncertainty. Lowering prudential standards will not generate demand for credit that is not there. For the banking sector, prudence is warranted as credit risks might be increasing. 
2. Second, surplus capacity freed by lighter supervision and potentially lower supervisory capital add-ons is not automatically channelled into the real economy. There are no mechanisms in the prudential rules to ensure that regulatory relief actually benefits the real economy. Instead, banks have made use of record profits in recent years to pay record dividends and carry out share buybacks. 
3. Third, risks in existing corporate lending are rising, even though banks continue to report low measured risk. The Bundesbank warns that the profitability of debtors is under pressure and default risks are rising. This gap between growing vulnerabilities and low-risk indicators is a warning sign. When banks report less risk than is in the system, it’s time to review risk measurement tools. Doing the exact opposite, and weakening supervision, would reduce banks’ ability to absorb losses precisely when resilience matters most.

Supervisory rules do influence how much capital banks operate with, but lowering supervisory ambition does not create productive lending where demand is weak or risks are rising. Framing prudential debates around competitiveness assumes a trade-off between economic growth and financial resilience, which simply isn’t there. In practice, weakening supervision is far more likely to reduce banks’ capacity to absorb losses than to unlock new investment for the real economy.

ESG and climate-related risks

This tension between competitiveness rhetoric and prudential reality was clearly visible in the central point of contention in the Bundestag hearing on ESG risk regulation. Calls to simplify and reduce regulatory burdens focused in particular on requirements for banks to identify, manage, and plan for environmental and climate-related risks (the so-called ‘ESG risk plans’ or ‘prudential transition plans’). Banking representatives warned of “double regulation” and excessive administrative costs, arguing for lighter or more discretionary treatment of ESG requirements. 

But supervisors and banks themselves have long asserted that environmental and climate-related risks are financial risks, and that clear standardised and enforceable risk management obligations, with transition plans, are vital for effective supervision and banks’ own ability to deal with these risks. Diluting these requirements would not reduce risk, but push it out of sight, weakening financial stability.

Over the past year, banks have repeatedly pointed to data gaps and uncertainty as key challenges in addressing ESG risks. This makes the case not for weaker rules, but for clearer and more coherent ones, combined with a precautionary supervisory approach. In this context, a crucial CRD provision being transposed is the possibility for supervisors to apply the existing systemic risk buffer to climate-related risks.

A dangerous narrative

By offering a simple answer to complex challenges, the lobby narrative increasingly defines political choices at both the EU and national levels. But treating prudential safeguards as an obstacle to growth, rather than a precondition for stability, weakens the foundations of the financial system and its capacity to support the economy in the long term.

Discover more Finance Watch analysis on financial stability, including our work on banking supervision, prudential safeguards and climate-related financial risks in the policy portal.