Battle over bank capital rules
Split over how much capital banks must hold.
Banks, member states and MEPs are fighting it out over the shape of planned European Union legislation on the amount of capital that financial institutions should be forced to hold.
The European Parliament, which is to present a report in January amending the European Commission’s initial proposal, is set for lengthy negotiations on how to ensure that the rules do not impede banks from lending to small and medium-sized enterprises (SMEs). MEPs will also consider whether to support the Commission’s plan to prevent countries from imposing their own minimum capital requirements.
Basel guidelines
The new rules, the fourth revision of the capital requirements directive (CRD IV), come in response to guidelines drawn up last year by the Basel Committee on Banking Supervision, known as Basel III. The EU is the first jurisdiction in the world to act on them.
The rules have taken on greater significance in light of the threat to the banking sector from the eurozone’s sovereign-debt crisis, highlighted by the collapse of the Franco-Belgian bank Dexia this month.
The banking industry is alarmed by some of the proposals. Many institutions maintain that if they have to retain extra capital, they will have to reduce lending, which could prove disastrous for small businesses.
Chris de Noose, the managing director of the European Savings Bank Group (ESBG), said that the proposal as it stood would “dramatically hinder retail bank lending to small and medium-sized enterprises”.
He said: “Basel III does not account for the specificities and diversity of the European banking sector. Unlike the US, the EU’s real economy is financed largely by the banking sector, whose smaller retail-banking institutions are important lenders to households and SMEs.”
It was a theme picked up by Andreas Treichl, the chief executive of Germany’s Erste Bank. He told a European Parliament hearing on 11 October that focusing so much on banks’ capital threshold while the sovereign-debt crisis was raging was “going on a very, very dangerous path”.
“Solving the bank capital problem without solving the European debt problem is not going to work,” he said. But he acknowledged that banks were learning lessons. “We have learned something very painful: that we have lent too much to too many people, and to too many governments who cannot afford to take on so much money.”
Some member states, notably the UK, oppose the plan to prevent countries imposing their own minimum capital thresholds.
The Commission wants to ensure that the rules are the same in every country, a move that Othmar Karas, a centre-right Austrian MEP who is leading the Parliament’s work on the issue, has hinted that he is likely to support.
Karas has also expressed concerns about the capacity of the European Banking Association (EBA), the pan-European supervisory body that is being called upon to do most of the work on the details of CRD IV.
There are fears that the EBA does not have the budget or the staff to carry out the mountain of work required of it if the 1 January 2013 deadline is to be met.
THE PROPOSAL
The European Commission’s capital requirements proposal specifies how much capital banks must retain, and introduces a more demanding definition than in the past of how that capital is to be constituted.
The minimum capital that banks will have to hold will continue to be set at 8% of their risk-weighted assets. But the proportion of this capital that must be of the highest quality (known as common equity tier 1, or CET1) will more than double, from 2% to 4.5%.
In addition, a new ‘conservation buffer’ (designed to prevent a situation in which taxpayers’ money is used for bank resolutions) will be fixed at 2.5%, bringing the total ratio of high-quality capital to 7%.
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