EU and industry officials say it is “unlikely” that Europe and the US will agree on new rules to strengthen the banking sector by the time of the G20 meeting in Hamburg on 7-8 July.
The Basel Committee worked over the last few months on a new set of rules to bolster banks’ supervision and their capacity to deal with potential new crises.
But the US and the European members of the body, in charge of forging international principles for the financial sector, are at loggerheads over models to assess the banks’ risk.
As a result, EU officials and senior sources inside the banking sector consider it “unlikely” that an agreement would be ready in time for the G20 leaders’ meeting in Germany next week.
Following months of dispute between Europe and the US, Basel Committee Secretary General Bill Coen said last May he hoped the reform would be finalised “in the near future”.
The pressure was growing from Washington to conclude the negotiations by the G20 summit
But the talks progressed at a snail’s pace as the Europeans struggled to defend a common position before their international partners.
Countries more affected by the changes, including Germany, France and The Netherlands, resisted the proposal made by the US, while Italy and Spain were more open to it.
An “intense debate” has taken place over whether it was better to have no deal or a bad deal, recalled Wim Mijs, the CEO of the European Banking Federation, during an event organised by EURACTIV.
Ultimately, European countries united behind the need to reach an agreement, he explained.
The recent interventions in three Italian banks and a Spanish lender “does not help our arguments” to oppose a deal, he admitted.
The European Commission Vice-President for the Euro and Financial services, Commissioner Valdis Dombrovskis, did not want to confirm on Thursday (29 June) whether an agreement was within reach.
But he said that the EU is “committed” to reaching a deal to complete the Basel III framework.
“We are open and constructive in our approach and willing to reach an agreement,” he told reporters.
He insisted that the two principles “important” for the European countries are that the new rules should not lead to a “substantial” increase in the capital requirements, and it should preserve the risk sensitivity of the supervisory framework.
Accordingly, banks involved in lending activities with lower risk should be subject to lower capital requirements.
The bone of contention between the US and the Europeans are the models used to assess the banks’ risks. In Europe, banks use their own models, but the new reform will bring a standardised model designed by the regulators.
Both sides disagree on the so-called “output floor”, which limits the banks’ use of their own models to assess the risks of their activities.
The differences have narrowed to almost only 5%, as sources estimate that the floor could be around 70% or 75% of the banks’ own risk models.
But EU officials pointed out that only a 5% difference could force more banks in Europe to raise capital, at times when the trust in the banking system is teetering and lending to the real economy is not totally restored.
Mijs welcomed the fact that this issue caught the attention of finance ministers as it is a “political discussion”, and not only for regulators and central bankers given its wider impact on the economy.
Last year, the issue was discussed by the EU ministers of Economy and Finance (the Ecofin Council).
“The rules mustn’t have particularly negative consequences for specific regions because banks’ balance sheets and the financial markets are structured quite differently around the world,” German Finance Minister Wolfgang Schäuble told reporters last September.
In the opposite camp among the Europeans, Spanish Minister of Economy Luis de Guindos said that Spain’s banks are “very calm” when it comes to the new models.
He added that the Spanish lenders would be “the least affected ones” if there was finally an agreement.
The weight of mortgages in the risk assessment plays a decisive role and influences the countries’ positions.
Mortgages are not part of the banks’ books in the US, while European countries with more stable mortgage markets would be penalised as they could not fully use their own models to take this factor into account.