EU ministers and regulators clash over tougher banking rules

How strict will the rules be for banks? There is an extensive debate on this in the European Union. This Tuesday, the finance ministers of the EU member states Agree on a plan. According to critics, it includes a significantly watered-down version of earlier internationally agreed agreements on capital buffers for banks.

Next year, ministers will have to agree the final rules, with the European Commission already making the first move last year, and the European Parliament giving its input in the coming months.

The debate is to what extent the ‘final’ Basel III rules, also known as ‘Basel 3.5’, will be adopted by European banks. International regulators Already agreed under the banner of the Basel Committee in 2017 Regarding these rules, it has been agreed that banks around the world will have to hold more capital from 2023. Compared to the ‘first’ Basel III rules introduced in 2010, this is thought to reduce the risk of a 2009-like credit crisis.

read more: Banks should hold more capital

Those provisions still had to be translated into concrete measures in various areas. That process is now in full swing; It now appears that a less stringent approach is being taken in Europe than regulators had in mind in 2017.

Banks themselves have limited space

The idea behind Basel 3.5 is that banks are given less room for individual adjustments to capital requirements. Until now, banks were allowed to calculate how much capital they needed to set aside for their loans based on their own internal models approved by the regulator. This means, among other things, that banks with multiple mortgages – loans with ‘safe’ collateral – maintain relatively few capital buffers compared to banks with riskier portfolios. Under Basel 3.5, it is agreed that even though the loan portfolio is ‘risk-free’, minimum capital must always be maintained, according to the bank. As a result, European banks will need to allocate 15 percent more capital on average.

The introduction of the ‘capital floor’ by ministers this Tuesday has been postponed, following a proposal from the European Commission last year. The idea behind Basel 3.5 is that the platform will be phased in over five years from 2023. But last year’s European Commission proposal, ministers this Tuesday, delayed the introduction of the ‘capital floor’ and extended it from 2025 to 2032. And many other rules have been relaxed or delayed in the proposal.

The idea behind the adjustment is that the rules are adapted to the specific European situation. For example, banks here have relatively more mortgages on their balance sheets compared to the US.

But the ‘dilution’ of Basel 3.5, as opponents call it, is not without resistance from regulators. The heads of European banking supervision, Andrea Enria at the European Central Bank and José Manuel Gamba at the European Banking Commission, he exclaimed in a blog post last week Urges European leaders to ‘stick to what is internationally agreed’ Both point out that Europe was already at the table in the negotiations that led to the agreements in 2017, in which the European situation was already taken into account. “It is misleading to say that the agreements are not relevant for the EU financial sector.”

Supporters of the adjustments – including banks’ lobby clubs – argue that the adjustments will help banks better support the EU economy. After all, if banks have to hold extra capital, that money can’t be used for loans.

Enría and Gamba wrote last week that Basel’s full introduction would be good for the economy. “Stronger rules create stronger banks. And stronger banks can better serve businesses, citizens and the economy.” ECB Vice President Luis de Guintos told a meeting of finance ministers on Tuesday that “any change could look like an isolated hole in the dyke protecting the banking system.” But together, all those holes affect solidity and stability.