The purpose is to eliminate indirect subsidies for these riskier activities, setting them apart from such socially valuable activities as provision of credit and payment services. 2 The effects on credit – First of all, these reforms produce a force for the contraction of banks’ balance sheets.
The tougher capital and liquidity requirements, the higher funding costs that will stem from the BRRD (which increases the risk of liabilities other than deposits covered by protection schemes), and any direct limits to operations will decrease the supply of credit.