The immediate implementation by the European Union of the Basel Committee's recommendations for international financial regulation would put significant strain on Europe's banks and aggravate the current climate of economic insecurity, argues Marie-France Baud of Confrontations Europe, a think-tank.
Marie-France Baud works on financial issues for the think-tank Confrontations Europe and is editor-in-chief of 'La Revue'.
This commentary was first published in Confrontations Europe's monthly newsletter 'Interface'.
"On the eve of the extraordinary summit of 21 July on Greece, Commissioner Michel Barnier presented the draft CRD 4 directive aimed at strengthening the solidity of the 8,300 banks operating in the EU and reducing the risk of systemic crisis.
It is one of the flagship initiatives of his term, i.e. to transpose the recommendations of the Basel Committee (Basel III) on the reform of the international financial system in line with the decisions taken at [the] G20 in Seoul, as a result of which consolidation of the banking system and of financial stability has become a global requirement.
The legislative package consists of a regulation and a directive. The regulation specifies the prudential standards for capital, both from a qualitative and a quantitative point of view, and for liquidity and is supported by two new ratios, the composition and calibration of which will be determined in 2015 and 2018 after a period of analysis and observation.
It also introduces a ratio aimed at limiting debt with a leverage effect and a corpus of uniform rules as provided for in the new European System of Financial Supervision. In addition to the additional capital buffers, aimed at coping with macroeconomic shocks, the directive makes provision for increasing the supervision of banking institutions and could impose fines of up to 10% of net banking income.
This reform, which would make European banks the first to apply the new Basel III prudential standards, implies a major effort on their part; according to an impact study conducted by the Commission, they will need to raise 460 billion euros of additional capital by 2019, including 84 billion within four years. The larger institutions have already strengthened their balance sheets.
After the panic that swept the markets, fuelled by a whole battery of bad news (lowering of the American note by Standard & Poor's, turbulence in sovereign debt in the euro area, a bout of fever regarding their exposure to sovereign debt – the new toxic products, recession fears for the global economy) and wild rumours along with the delays in implementing the Greek rescue plan, European banks are again caught by the crisis.
In France, they are crystallising the distrust of investors, who are worried that the recent stress tests have not given due consideration to the risk of depreciation of government securities, or even of an actual default. But unlike in 2008, when EU member states had to commit to 3.596 billion euros (including guarantees for bank loans) and actually paid 1.225 billion, the sector can no longer rely on public authorities to bail it out.
The world has changed. Is there an alternative to government support? Yes. There is the 'bail-in', which offloads the burden of redeployment on the shareholders and creditors of a bank and includes specific provisions.
The exposure of European banks in the Greek, Portuguese, Spanish and Italian markets shows that we are not shielded from a new crisis, and the markets are in need of strong political signals – including the presentation of a framework for solving the bankruptcy problems of cross-border groups, which is slow to come.
In today's context of growing anxiety, caused not only by the collapse of the stock markets but also by the surge in general risk aversion, the implementation of CRD 4 is becoming perilous because of the consequences it may have on the real economy: the banks will increase the price of or grant fewer loans to companies and households, give priority to loans bringing in deposits (e.g. real estate loans) and become reluctant about export credits, factoring, syndicated loans, project funding, etc.
In short, the funding of business trade cycles will be seriously undermined.
Voices are already being heard on both sides of the Channel, asking that some lead time be given to the industry before it is expected to comply with CRD 4 requirements.
But whether this is actually the problem or not is hard to say, bearing in mind that the new rules should come into force gradually, and not before 2013."