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The European Commission’s proposals to better insulate EU banks from shocks have been met by the industry with concerns that they gold-plate Basel III rules [from Global Risk Regulator]. 

On October 27, the European Commission released a legislative package to inscribe Basel III rules into the capital requirements directive (CRD) 6 and capital requirements regulation (CRR) 3 along with amendments to its resolution procedures.

The commission said in a statement that the package faithfully implements Basel III while acknowledging specific characteristics of the bloc’s banks. 

It added that the proposals ensure that bank internal models do not underestimate risk, foster better capitalisation and make it easier to compare risk ratios across banks without significantly bumping up capital requirements. 

“The commission’s proposals differ quite widely from the global Basel standards, both in terms of their timing and their content. This will create more regulatory divergence and an increasingly complex regulatory landscape, in particular for international banks,” warns David Strachan, head of Deloitte’s Europe, the Middle East and Africa centre for regulatory strategy. 

The commission’s proposals differ quite widely from the global Basel standards

David Strachan, Deloitte

The commission estimates the package will see an increase in average minimum capital requirements of between 6.4% and 8.4%. “These figures are considerably lower than the previous impact assessment done by the European Banking Authority, which estimated an 18.5% average increase in minimum capital requirements if the Basel 3.1 framework was implemented in full. This gap in estimates shows the likely effect of the modifications that the CRD6/CRR3 proposal contains,” says Mr Strachan. 

The European Banking Federation (EBF) has reflected on the €27bn in extra capital needed for banks to meet the proposed minimum capital requirements. It warned that they do not reflect the capital amounts most banks will have to raise to maintain the current capital ratio of 15%. Given the role of capital buffers in supporting the EU economy during the Covid-19 shock, the EBF is calling for the authorities to disclose the amount of capital needed to restore the current 15% capital ratio after implementing Basel III.

The federation expressed concern over ‘double counting’ in the package. It said national buffers are an additional layer of gold-plated rules, multiplying the buffer requirements and the complexity of the EU regulatory framework. “The output floor should be applied only to the international buffers, as in other jurisdictions,” it said.

Already well capitalised 

The Association for Financial Markets in Europe (AFME) noted that European banks hold record capital levels and called on legislators not to go beyond Basel standards. “Unfortunately, several impact studies suggest that this is unlikely to be the case with the largest European banks facing material increases to their capital requirements, especially once all required capital buffers, such as banks’ management buffers, are included. This could have negative consequences for lending,” said AFME head of prudential regulation Michael Lever. Nonetheless, he welcomed the commission extending the implementation date to January 1, 2025.

The commission wants to ensure banks can cope with environmental, social and governance (ESG) risks. Banks would be required to identify, disclose and manage ESG risks as part of their risk management. The measures include regular climate stress testing and supervisory reviews. 

The package envisages supervisors having better tools to assess whether senior staff are up to running a bank and for overseeing fintechs. It also delves into supervising third-country bank branches in the EU: a national supervisor competence. The EU wants to harmonise those rules.  

“Today’s proposal puts more pressure on the alignment between the EU and other countries’ regulatory frameworks for bank capital,” says Mr Strachan. “For an international bank operating in Europe, particularly if it operates in the EU through a third country branch, this means an increasingly different regulatory environment, as well as having potential competitiveness implications.” 

AFME supports the proposals with the caveat that they should retain a high degree of reliance on national supervisory regimes and avoid any unnecessary local subsidiarisation. The Banker’s sister publication Global Risk Regulator will publish a follow-up article on the commission’s proposals in December. 

This article first appeared in The Banker’s sister publication Global Risk Regulator.


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