MEPs lament ‘piecemeal’ laws on bank capital

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MEPs have demanded more information from the European Commission ahead of talks with global banking policymakers designed to overhaul rules on how much capital is on banks' balance sheets.

On Friday (26 February), the European Commission announced its fourth overhaul of rules on capital adequacy at all financial institutions, designed to protect depositors and remove the burden of bank rescues from taxpayers.

Banks have already committed to holding more capital on their balance sheets under the Basel Accords, but EU rules intend to create a more level playing field in the financial sector.

MEPs who will be drafting the new laws have asked the Commission to give them more information about their talks with the Basel Committee, the global banking policy body, before they are asked to rubberstamp another rulebook on capital adequacy.

According to the EU executive, the fourth Capital Requirements Directive (CRD IV) would encompass liquidity standards, definition of capital, leverage ratios, counterparty credit risk, countercyclical measures, systemically important institutions and lastly a single rulebook on all of the above.

'Piecemeal laws not good enough'

MEPs say they are growing weary of the Commission's piecemeal trickle of new rules and they want to change the way the EU executive negotiates CRD with the Basel Committee.

The ink has barely dried on current CRD III amendments under consideration at the European Parliament, which will now likely face fresh legislation and debate in the summer on CRD IV, say MEPs on the legislature's economics committee.

In her report out next week, Arlene McCarthy, the MEP overseeing CRD legislation, will be asking the Commission for more consultation to speed up the legislative process on CRD IV.

Expected losses vs. unexpected losses

CRD IV heralds a different approach to capturing capital called 'dynamic provisioning', which has been in action in Spanish banks for the past 10 years.

Dynamic provisioning means banks set aside capital to cover expected risks based on the institutions' experiences in booms and busts.

This is distinct from previous rhetoric at the G20 in Pittsburgh last year, which according to Basel rules would require banks to hold capital buffers of up to 8% of calculated risks (EURACTIV 07/09/10).

Though Spain's collapsing housing market should not serve as an example of good lending, generally, the country's banks have come out stronger given the scale of the crisis there.

Provisioning has curried more favour with banks who participated in a previous consultation because capital buffers would ask banks to hold more capital for unexpected risks.

According to Dutch bank ING, first movers, meaning institutions which relinquish capital to plug gaps before others do, could lose out as a result of capital buffers.

"ING is in favour of an expected loss model of provisioning that reduces pro-cyclicality in accounting results," the bank said in an earlier consultation.

The Commission will launch an impact study this year to see whether the EU's draft rules will yield better liquidity.

EU rules on capital requirements are designed to protect savers and investors from the risk of the failure or bankruptcy of banks. They ensure that these institutions hold a minimum amount of capital. 

The Capital Requirements Directive, adopted in 2006, has just been amended by the EU institutions (EURACTIV 07/05/09) and is currently under review again following the financial crisis.

Specifically, the European Commission is working on a legislative proposal aimed at introducing tighter standards to assess the impact on capital requirements of remuneration and securitisation in the banking sector. The plan is currently being held up by disputes between member states (EURACTIV 01/07/09).

  • July 2010: Parliament votes on CRD III.
  • July 2010: Commission adopts legislation on CRD IV.

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