The European Commission has finally succeeded in calming the spirits, by presenting, Wednesday, October 27, its reform of the banking regulation of the European Union (EU). This text transposes into European law the international agreement painfully concluded in December 2017 within the Basel Committee, this forum bringing together supervisors from 27 countries and which works to strengthen the soundness of the global financial system.
This agreement, obtained after a hard fight between States with often divergent interests, came to finalize the regulatory edifice gradually built in the aftermath of the 2008 financial crisis. The EU becomes the first jurisdiction to launch the transposition of these international measures.
The road was complicated to arrive at a text taking into account European particularities, while remaining in the spirit of Basel and multilateralism, so as not to discourage the United States, Japan, the United Kingdom or Brazil to apply in turn this regulation. All under pressure from the banks and from certain States which, like France, wanted to relax the rules as much as possible to preserve European financial competitiveness in the face of international competition.
Capital floor
The key point of Basel III is included in the European “banking package”: the establishment of a “capital floor” (or output floor). What is it about ? Today, two methods are opposed to calculate the risks taken by banks. American banks generally assess a borrower’s risk based on data from international rating agencies, this is the so-called “standard” model. The European institutions favor “internal” models, by evaluating the risks themselves, on the basis, in particular, of historical data.
The G20 had given the Basel Committee a mandate not to increase capital requirements too much so as not to penalize the financing of the economy.
This second method has the advantage of reducing the volume of capital to be put in reserve. To limit this gain, banks using the internal model in the future will not be able to fall below 72.5% of the level of equity (or capital) required by the standard model. These new rules were to apply gradually from 2023, but the Commission wants to give institutions more time to adapt and proposes to delay their application by two years, to 2025.
In addition to this flexibility of schedule, the institution wants to adjust, temporarily, certain specific rules for calculating risks, for example those concerning loans to small businesses or mortgage loans, which are less risky in Europe than in the United States. According to Commission calculations, this finalization of the Basel III reform should lead to an increase in the capital requirements of EU banks “Less than 9% on average” by 2030. A level in line with the mandate given by the G20 to the Basel Committee not to increase excessively the requirements for additional capital, so as not to penalize the financing of the economy.
If European banks protested against this regulatory tightening, Joachim Wuermeling, member of the executive board of the German central bank, said that it could have been worse and that German banks “Can be relieved”. “This text is still insufficient, for example on the treatment of market risks or real estate loans, but it is a basis for negotiation”, indicates Nicolas Théry, president of the French Banking Federation and of Crédit Mutuel. This Commission proposal must now be discussed with the co-legislators, the European Council and MEPs.