With the lesson learned from the financial crisis, the European Commission on Wednesday presented proposals for review the banking regulations of the EU with the aim of guaranteeing banks more resistant to future crises and that at the same time contribute to economic recovery. The reform completes the application of the rules on capital requirements known as Basel III – approved in 2017 – although taking into account the specific characteristics of the European banking sector and giving a greater margin. Therefore, instead of raising the requirements for 2030 by 18.5% (as required by the international agreement), banks will have to increase their volume of funds against losses by 9% (or about 27,000 million) with a intermediate increase of less than 3% in 2025.
“Banks in Europe have a lot more capital than they had before the crisis financial services but they still face challenges regarding profitability ”, acknowledged the commissioner responsible for financial services, Mairead MacGuinness, who has defined as“ balanced ”the new package with which they not only aspire to strengthen resilience but also vigilance, with stricter supervision to protect financial stability. “We will empower supervisors to evaluate banking operations and assess that bank managers are adequately trained for their tasks,” explained Vice President Valdis Domvrovskis. For example, in response to the Wirecard scandal, supervisors will now have better tools to monitor fintech groups, including bank affiliates.
The intention of Brussels is that the new rules begin to apply from January 1, 2025 – with an additional transition period of five years – two years after the date set by the Basel III committee, which is March 2020, and due to the covid19 pandemic, it decided to postpone the entry into force to January 1, 2023. According to Brussels, the extra period will allow banks to focus on the management of financial risks derived from pandemic, in financing the recovery, and will give them ample time to adjust before the reform reaches its full effect.
The proposal aims ensure that “internal models” used by banks to calculate their capital requirements do not underestimate the risks, ensuring that the capital necessary to cover these risks is sufficient. This, according to Brussels, will facilitate the comparison of capital ratios based on risk between credit institutions, restoring trust in such coefficients and the solidity of the sector in general.
Brussels also wants to force banks to systematically identify, disclose and manage environmental, social and governance risks as part of their risk management. For example, with periodic climate change stress tests by both supervisors and banks. In these tests, all banks will have to reveal the degree to which they are exposed, although the size of the entities will be taken into account to avoid undue administrative burdens.
Branches in third countries
The review also addresses the issue of the establishment of third country bank branches in the EU. At present, these branches are mainly subject to national legislation, which is harmonized only to a small extent. Today’s package harmonises EU rules in this area, allowing supervisors to better manage the risks related to these entities, which have considerably intensified their activity in the EU in recent years.
According to the Community Executive, the macroeconomic analyzes carried out by the European Central Bank show that the Basel reforms will have a “positive effect” on the EU economy in the long term by restoring confidence in the banking sector. “As I have often said during the crisis, European banks are not part of the problem but of the solution,” said Dombrovskis, who explained that with the reform banks will have a “minimum floor” of capital and that the capital requirements calculated with internal models cannot fall below 72.5% of what they would be if the bank used standardized models. The next stage will be the negotiation of the changes by the Council and the European Parliament.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.