Several EU states are fighting a last-ditch battle to thin down the bloc’s most significant change in banking regulation for a decade, as Brussels prepares to set out long-awaited legislation.
The proposed rules will introduce a new capital minimum, or floor, making it harder for banks to use their own internal calculations to decide the size of their capital base.
The European Commission is expected to propose the rules — part of the international Basel III banking reforms — in September or October. But capitals led by Paris, Berlin, Copenhagen and Luxembourg are trying to persuade the commission to moderate the minimum level imposed, according to those involved in the discussions. The way in which the international standards have been drawn up threatens to penalise EU banks, they argue.
Jörg Kukies, deputy finance minister of Germany, told the Financial Times that the Franco-German proposal was “a pragmatic way of ensuring a truthful and compliant Basel implementation on the one hand and respecting the political mandate of [the EU’s economic and financial affairs council] and G20 for no significant increase in capital requirements as well”.
The new rules are due to come into force between 2023 and 2028, delayed by a year because of the pandemic. Some diplomats said the need to foster Europe’s economic recovery from Covid-19 had strengthened the case for the commission to strike a balance.
A new impact assessment by the Copenhagen Economics consultancy commissioned by the European Banking Federation estimated the Basel agreement would leave eurozone banks needing to raise €170bn-€230bn of capital or to cut their lending by €600bn-€700bn to fully rebuild their buffers above minimum levels. The report published on Wednesday added that the rules would raise borrowing costs for EU companies by 0.25 percentage points and wipe 0.4 per cent off gross domestic product.
Central bankers and regulators struck the deal to tighten the rules in 2017, including a contentious “output floor” preventing banks from using risk estimates that are too far below the outputs of a standardised model devised by regulators. The concept caused concern in countries including France, Germany and Nordic states that make heavy use of internal models.
The standards could force banks to raise the amount of capital they hold by more than 10 per cent, according to European Banking Authority calculations. The four states are arguing instead for a so-called “parallel stack” approach that would help prevent a big uplift in capital requirements by subjecting two versions of a bank’s balance sheet to different rules.
A French official said Paris wanted to “strictly apply the Basel agreement” on the output floor, no more and no less. “It is about finding a way of doing it in Europe that avoids gold-plating and over-transposition,” the official argued. “All in all, any two-digit [per cent] increase in capital requirements would for us be too significant as it goes against the commitment made to the G20.”
The alternative “single stack” approach — which involves blanket application of the rules — is stricter and has been championed by other countries such as the Netherlands, and by the EBA. The EBA’s analysis suggests it would increase capital requirements by 18.5 per cent, leaving the eurozone banking sector with an estimated €52.2bn capital shortfall.
In 2019 the EBA warned that the parallel stack approach was not compliant with the Basel agreement.
Andrea Enria, president of supervision at the European Central Bank, said last month it was “of fundamental importance” that the EU “does not give in to the temptation to introduce creative approaches”, such as a parallel stack rule.
The Dutch government said in a position paper presented to its parliament this week: “In the interest of consistency, simplicity and the robustness of the framework, a single stack approach, which includes the EU-specific capital requirements, should be used.”
An EU official said there had been “pushback on the issue of output floor, because a number of banks worried that capital requirements might shoot up excessively. We think that these increases will be well short of some of the earlier forecasts.”
The commission told the FT: “We will be implementing Basel, including the output floor. We also have to ensure the implementation does not translate into significant increases of capital for the EU banking sector in general. The capacity of the banking sector to finance the economic recovery should be maintained. We think we can achieve that whilst remaining faithful to the key elements of the reform.”
The German government is also concerned that the rules would increase banks’ capital requirements for loans to companies without external credit ratings. Instead it has proposed a hybrid approach based on banks’ internal estimates of a company’s riskiness.
The commission is working on legislation to bring the new regime into force; it will then be finalised by the European Parliament and the Council of EU ministers.