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Categorized | Banks

Brussels unveils overhaul of EU banking rules

Posted on November 23, 2016

Brussels has proposed an array of changes to EU banking rules in an effort to end the era of taxpayer bailouts while also sweeping away red tape that officials fear could be holding back lending.

The measures range from adjustments to banker bonus rules to plans for forcing US and other non-EU banks to set up holding companies within Europe.

The plans are set to spark fierce discussions between national governments over how far to go in toughening requirements for their banks, and also provide a glimpse into the post-Brexit regulatory landscape.

Valdis Dombrovskis, European Commission vice president in charge of financial services policy, said on Wednesday the measures amounted to a “substantial risk-reduction package” that would make the financial industry safer and inject more “proportionality” to some existing laws.

One of the most controversial parts of Mr Dombrovskis’ proposals, diplomats say, is his plan on how to roll out a new international rule for the biggest banks.

The commission has faced intense lobbying from some capitals, including Paris and Rome, over how to enshrine the new rule — known as Total Loss Absorbing Capacity, or TLAC — into EU law.

The standard, agreed on by the G20 nations last year, has been hailed by central bankers such as the ECB’s Mario Draghi and the Bank of England’s Mark Carney as a key breakthrough in the battle to prevent any bank being too-big-to-fail.

It will force banks to issue a minimum amount of subordinated debt and other securities that could easily be written off or converted into equity if they get into difficulties, so giving regulators an easy way to boost a stricken bank’s capital position. It is expected to force banks to issue billions in new debt.

Brussels has rejected requests from Paris that the measure should apply to a wider group of banks in Europe than the small number covered by the G20 deal.

Currently, it is foreseen that the standard would only apply to 13 banks in Europe, including France’s BNP Paribas, Société Générale, Crédit Agricole and Groupe BPCE, leading to French concerns that its financial industry will be disproportionately hit.

France, alongside Italy, has also argued that central banks and other supervisors should not be allowed to set requirements for banks that are tougher than the international TLAC standard. This argument has won some support from the commission, which is proposing that authorities would need to show why any extra requirements are “necessary, proportionate and justified”.

For Sven Giegold, a German lawmaker in the European Parliament involved in drafting many of the EU’s post-crisis financial rules, this aspect of the commission’s plans would “cut the wings” of regulators tasked with preventing financial crises. “Some big banks continue to be thinly capitalised,” he warned.

While Mr Dombrovskis’ policy package focuses on implementing international agreements, it also seeks to hand European regulators more control of non-EU banks. In the wake of US moves to force the biggest foreign banks on its territory to set themselves up as holding companies that must comply with US capital requirements and other rules, the commission wants to impose a similar measure on foreign banks operating in Europe.

Mr Dombrovskis said his proposals include the fruits of last year’s appeal for evidence of problems in the EU’s existing financial rule book. The initiative prompted a torrent of replies from industry lobbyists.

As a result, the commission proposes slashing reporting requirements and other red tape for smaller banks. It also suggests exempting them, along with independent brokerages, from some bonus rules — a step already outlined by the commission earlier this year.

Brussels has also proposed tweaking existing legislation, agreed at the height of the euro area debt crisis, that empowers regulators to write down creditors at crisis-hit banks. The amendments respond to warnings from lenders that this had inadvertently blocked them from selling bonds to Hong Kong-based investors. The rule changes require approval from the European Parliament and national governments to take effect.