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Currencies

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Capital Markets

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Categorized | Banks

Berlin and Paris on collision course over EU banking rules


Posted on November 24, 2016

Germany and France are set to clash over a planned overhaul of EU banking regulations amid concerns in Berlin that the proposals fail to do enough to shield taxpayers from the costs of banking crises.

Berlin is anxious about a package of reforms unveiled by the European Commission on Wednesday, notably its proposal for how Europe should apply a new international standard for dealing with a large bank when it fails.

Senior German officials are concerned that aspects of the reforms would overly constrain bank supervisors. They want to preserve the freedom for supervisors to demand buffers that go beyond agreed international minimum standards.

The row is set to deepen an already sizeable split between national governments over the future direction of Europe’s banking union, an ambitious but incomplete integration project agreed at the height of the eurozone debt crisis to restore confidence.

Wolfgang Schäuble, Germany’s finance minister, has argued that further steps to build the banking union should be taken only once Europe has agreed on a tough regime of measures to reduce risks in its banks. However, Berlin thinks the Brussels package falls short in key areas.

Berlin’s stance over the rule, known as total loss absorbing capacity, or TLAC, is sharply at odds with that of Paris and Rome, which have pushed for inbuilt curbs on overzealous authorities to avoid European financial groups being put at a competitive disadvantage.

In his proposals on Wednesday, Valdis Dombrovskis, the European Commission vice-president responsible for financial policy, said authorities should be able to set tougher rules only if they could demonstrate that the extra requirements were “justified, necessary and proportionate”.

Within the eurozone, this would rein in the Single Resolution Board, or SRB, the currency area’s agency for handling failed banks, which was established last year.

The TLAC rule will force large banks to issue more securities that can be easily written off if they fail, so reducing any need for a taxpayer bailout. Central bankers, such as Mario Draghi of the European Central Bank and the Bank of England’s Mark Carney, have hailed the measure as a step towards ending the problem of institutions being “too big to fail”.

“We do think that the proposal needs to be improved substantially,” said one senior German official. “We definitely need more work in the risk reduction area.”

In addition to concerns about constraints on the powers of the SRB, Germany is worried by proposals from the commission for determining which types of bonds banks should be able to count towards their TLAC buffers.

The plans from the commission aim to set common rules on when debt should count as “subordinated” and so be eligible to count towards TLAC. Berlin, however, said that the approach chosen by the commission was too reliant on raising new debt, meaning it would take too long to reach targets.

Berlin’s assessment that the Dombrovskis proposals fall short of the “risk-reduction package” that it is seeking is bad for many eurozone governments, notably in southern Europe, that want to accelerate work on further developing the banking union.

The commission last year proposed a common eurozone system for guaranteeing bank deposits but the proposal has become bogged down amid national splits.

Similarly, France is keen for work to progress swiftly on setting up some kind of “public backstop” that could be tapped as a last resort if a large bank were to fail.