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EU’s banks face stringent capital rules

20-07-2011 (updated: 22-07-2011 )

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The EU will today (20 July) unveil new rules requiring banks to have three times as much capital on their balance sheets. Banks are eyeing the new rules with caution, while some governments warn that the requirements may be too tough. 

The European Commission will announce new rules based on internationally-agreed guidelines on banking capital approved in December 2010 by the Basel Committee on Banking Supervision, the so-called Basel III Accord.

The EU executive will ask lenders to increase the amount of core capital they must hold to stave off insolvency from 2% to 7% of their assets. Overall, banks will need to raise about €423 billion by 2019 to comply with Basel III and the Capital Requirements Directive (CRD) IV, according to a draft proposal.

In addition, bank assets' value will be weighted according to how risky they are and the definition of capital that qualifies as core will also be tightened.

In the EU, the rules will apply to 8,350 banks approximately, while in the US only around 20 banks will have to comply with the new capital rules.

Today's announcement will be the fourth revision of the bloc's Capital Requirements Directive after the European Parliament approved CRD III early this summer.

"We have never had EU laws on liquidity before," an EU source said in praise of the new rules.

Leading to more instability?

Lenders are worried that the new rules will lead to less, not more financial stability. Banks have long argued that higher capital rules will squeeze lending to small and medium-sized enterprises.

The European Savings Banks Group has previously warned that the new rules should not apply to all lenders large, small, regional and international, but to those that are systemically relevant and have a critical mass of financial activities at home and abroad.

Stress tests presented last week – which highlighted that eight lenders have a combined capital deficit of 2.5 billion – included some of the criteria under CRD IV, such as which kind of assets qualify as part of a bank's total capital.

A German bank which disagreed with the use of Basel in the test pulled out two days before the results were published on 15 July.

The lender held a form of capital, called non-voting capital, which will no longer count towards total assets under the new regulation.

Though the Commission is set to announce the rules with a view to enforcement as soon as possible, they will likely face resistance once member states and the European Parliament are asked to vote on them later this year.

Spain, the UK and Sweden have already heavily criticised the new requirements, as they argue that many banks which have received state aid are tied to national budgets and that governments should have some discretion over how stringent capital requirements are.  

Positions

Calling for clarity on Basel III, the Association of Chartered Certified Accountants said yesterday: "Even though the need for a new framework is accepted by all, both regulators and the banking industry have warned that its implementation will have a disproportionately negative impact on SMEs' access to finance. ACCA argues that an impact assessment is needed into how negative this will be, and in what ways, which remains unclear."

In response to Basel III, the European Association of Co-operative Banks underlined the importance of proportional rules: "Proportionality is for me the key principle, one-size-fits-all regulation would not be appropriate in Europe," said Hervé Guider, the association's general manager.

"A few weeks ago, some people were accusing us of damaging the economic recovery by implementing rules which would be too tough for banks because they would impede their lending to the real economy. Today, others seem to accuse us of the opposite, with suggestions Europe would not be implementing Basel properly, thus not learning all the lessons from the crisis. Both criticisms are unjustified and simply factually wrong," Michel Barnier, the EU commissioner responsible for financial regulation, said in a recent speech. 

Background

The Capital Requirements Directive (CRD), adopted in 2006, is currently undergoing its fourth review at the European Commission (EURACTIV 01/03/10). The rules would enforce proposals under discussion by the Basel Committee for Banking Supervision, which sets minimum standards for banks in 27 countries and includes global standard setters like Ben Bernanke, chairman of the Federal Reserve.

In July, Germany was the only member of the Basel Committee, which gathers banking supervisors and central bankers, to refuse to endorse draft rules on new minimum levels of capital which banks will have to hold.

Meanwhile, on 7 July 2010, the European Parliament adopted the EU's third round of revisions to the CRD. The EU's finance ministers approved the Parliament's text in October 2010, bringing the legislative process on CRD III to a close. 

CRD III requires banks to adopt new policies on the structure, amount and timing of bonus payments to prevent traders from underwriting risky deals in order to boost their salaries.  

The new principles even go beyond the recommendations of the G20's Financial Stability Board, because they impose limits on cash bonuses, require a partial deferral of bonuses and place a cap on their amount relative to fixed salaries.

Today's announcement will be the fourth revision of the bloc's Capital Requirements Directive after the European Parliament approved CRD III early this summer.

Timeline

 

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