The introduction of stress-testing and new capital requirements by the European Banking Authority in 2011 accelerated the process that had already been in place since 2008: shrinking the balance sheets of many European banks. Losses on eurozone periphery assets drove that process still further.
However, bank regulations create more than one way to shrink. Selling part of a bank’s portfolios is the most obvious method, but hardly an attractive one in a falling market. As capital is measured as a proportion of risk-weighted assets (RWAs) rather than just gross assets, the alternative method is to reduce risk even while the total size of the balance sheet remains steady.
