Paris and Berlin lead a fight to water down Brussels’ stricter rules on bank capital
Several EU states are waging an ultimate battle to fine-tune the bloc’s biggest change in banking regulation in a decade, as Brussels prepares to pass long-awaited legislation.
The proposed rules will introduce a new minimum capital, or floor, which will make it more difficult for banks to use their own internal calculations to decide the size of their capital base.
The European Commission is expected to come up with the rules – which are part of the Basel III banking reforms – in September or October. But the capitals led by Paris, Berlin, Copenhagen and Luxembourg are trying to persuade the commission to moderate the minimum level imposed, according to people involved in the discussions. The way international standards have been developed threatens to penalize EU banks, they say.
Jörg Kukies, German Deputy Minister of Finance, told the Financial Times that the Franco-German proposal was “a pragmatic way to ensure a truthful and compliant implementation of Basel on the one hand and to respect the political mandate of [the EU’s economic and financial affairs council] and the G20 for the absence of a significant increase in capital requirements as well ”.
The new rules are expected to come into effect between 2023 and 2028, delayed by a year due to the pandemic. Some diplomats have said the need to foster Europe’s economic recovery after Covid-19 has strengthened the case for the committee to strike a balance.
Central bankers and regulators struck a deal to tighten the rules in 2017, including a controversial “exit floor” preventing banks from using risk estimates too lower than the outputs of a standardized model designed by regulators. The concept has raised concerns in countries like France, Germany and the Nordic states which make heavy use of internal models.
The standards could force banks to increase the amount of capital they hold by more than 10 percent, according to calculations by the European Banking Authority. Instead, the four states are arguing for a so-called “parallel stack” approach that would help avoid a sharp increase in capital requirements.
A French official said Paris wanted to “strictly enforce the Basel Accord” on the exit floor, no more and no less. “It’s about finding a way to do it in Europe that avoids gold plating and excessive transposition,” said the official. “Overall, any two-digit code [per cent] an increase in capital requirements would be too important for us because it goes against the commitment made to the G20.
The alternative “single stack” approach – which involves global application of the rules – is stricter and has been championed by other countries such as the Netherlands and by the EBA. The EBAs Analysis suggests that this would increase capital requirements by 18.5%, leaving the eurozone banking sector with an estimated capital gap of € 52.2 billion.
In 2019, the EBA warned that the parallel stack approach was not in line with the Basel Accord.
Andrea Enria, President of Supervision at the European Central Bank, said last month it was “of fundamental importance” that the EU “does not give in to the temptation to introduce creative approaches”, such as a parallel stack rule.
The Dutch government said in a position paper presented to its parliament this week: “In the interests of consistency, simplicity and robustness of the framework, a single stack approach, which includes specific capital requirements to the EU, should be used. “
An EU official said there had been “a setback on the issue of the production floor, as a number of banks feared that capital requirements could rise excessively. We believe these increases will be well below some of the previous forecasts.. ”
The commission told the FT: “We are going to implement Basel, including the exit floor. We must also ensure that the implementation does not translate into significant capital increases for the EU banking sector in general. The ability of the banking sector to finance the economic recovery should be maintained. We believe we can achieve this while remaining true to the key elements of the reform. ”
The German government is also concerned that the rules will increase banks’ capital requirements for business loans without an external credit rating. Instead, he proposed a hybrid approach based on internal bank estimates of how risky a business is.
The commission is working on legislation to put the new regime into effect; it will then be finalized by the European Parliament and the EU Council of Ministers.