EU to adopt new Basel rules in 2011

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The European Commission yesterday announced plans to adopt new capital rules for banks next year after the Basel Banking Committee agreed to higher capital standards on Sunday (12 September).

"The Commission will propose, in the first quarter of 2011, the necessary legislative texts to transpose into European law the principles agreed yesterday evening," Internal Market Commissioner Michel Barnier said on Monday (13 September).

The EU's adoption of the Basel rules will take the form of a revision of the directives on capital requirements. This will be the fourth revision of the bloc's Capital Requirements Directive after the European Parliament approved CRD III early this summer.

Policymakers – including Barnier – have welcomed the Basel group's agreement, which has been on the cards since the Lehman Brothers crash in 2008.

Banks will have to store up to 7% more capital as a line of defence against future crashes in stock markets. Common equity requirements have been hiked from 2.5% to 4% and banks will also be expected to have capital buffers of 2.5%.

Some countries were pushing for an additional buffer of 2.5% for a total of 9.5%, but the group could not agree on this level and will allow individual countries to adopt it if they want.

"This agreement will have a major impact for our continent as Europe is home to half of the world's global banking assets," Barnier said.

"The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth," stated Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank.

The financial sector warns that the new rules will reduce their profitability and raise the cost of borrowing at a time when economic growth is lagging.

Regulators argue that banks will have a nine-year adjustment period to wean themselves off support and adopt the new rules slowly.

"The new rules could lead to a 1-2% decline in annual growth rates," argues Kevin Newman, a financial analyst.

Newman also warns that the Basel policymakers have not thought about how possible negative growth would be compensated by other means.

"We need another source of growth and I don't see it."

The Basel rules are subject to approval in November by the next G20 group meeting in Seoul.

Countries will have to phase in the new rules by 1 January 2013, but their entry into force is staggered  for the agreement's stricter regulations. Some provisions will not take full effect until the beginning of 2019.

In a move that will please Germany's public-sector Landesbanks, which recently said they would need to raise 50 billion euros to satisfy Basel III, the Basel group agreed to let banks receive bailout money for capital reserves until 2017.

To shoulder the burden of the higher reserves – and to accommodate the acquisition of Deutsche Postbank, Germany's biggest lender, Deutsche Bank said it would sell shares to raise 9.8 billion on capital markets.

The World Savings Banks Institute and the European Savings Banks Group issued a statement in support of all efforts to strengthen the resilience of the banking sector.

"However, regarding the current proposals, WSBI and ESBG find it regrettable that the Basel Committee has adopted a 'one size fits all' approach for capital, but does not make use of the possibilities for fine tuning according to banks' activities," the statement read.

“European banks will meet the new requirements," said Guido Ravoet, secretary-general of the European Banking Federation.

"But it will have consequences on the volume and cost of lending and therefore a cost on our economy too. I would like to stress that in Europe, 75% of lending to the private sector is carried out by banks, against only 25% in the US," he added.

Basel III's "contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery," said Jean-Claude Trichet, president of the European Central Bank.

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 are expected to approve 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 also place a cap on their amount relative to fixed salaries.

  • 2011: EU to amend Capital Requirements Directive for fourth time.
  • 1 Jan. 2013: Banks to begin adopting Basel III rules.

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