Banks in Europe have to adjust to stricter capital rules. After a long period of preparation, the EU Commission has put forward proposals for the implementation of the “Basel III” reforms.
The grace period for Europe’s banks in the implementation of stricter capital rules is coming to an end: The requirements introduced internationally after the financial market crisis are now being implemented in the European Union.
However, the EU Commission wants to grant the financial institutions long transition periods.
EU finance commissioner Mairead McGuinness and economic commissioner Valdis Dombrovskis presented proposals for the final implementation of the “Basel III” reform on Wednesday. According to this, banks in the European Union would have to increase their capital buffers by up to 8.4 percent by 2030 in order to cushion possible risks. According to the will of the EU Commission, banks are to gradually secure loans to companies that are not rated by rating agencies with more equity until the end of 2032.
When calculating risks, banks are only allowed to use their own models to a limited extent. 72.5 percent of them will have to stick to more conservative standard models in the future. In other words: For a loan for which the standard approach provides a capital buffer of EUR 1000, a bank must set aside at least EUR 725 – even if its internal model calculates a lower risk of default and thus a lower capital requirement. Brussels gives banks five years to implement this requirement, which mainly affects large banks.
Reform follows agreed compromise
Before the EU Commission’s proposals come into force, the European Parliament and the EU member states must agree. After the financial market crisis of 2008/2009, the reforms were initiated at the international level in order to reduce risks in the global financial system. In essence, the Brussels authority is following the compromise agreed upon at the end of 2017 after months of dispute between Europeans and Americans to shape these stricter rules.
“Today’s proposal ensures that we meet the core elements of the international Basel III standards. This is important for the stability and resilience of our banks, ”said Dombrovskis.
The Bundesbank spoke of moderate effects for the German institutes. “The higher capital ratios are easy to meet for the vast majority of banks, but not for all,” said Bundesbank board member Joachim Wuermeling in Frankfurt. If the Brussels proposals are implemented, the minimum capital requirement for the German banking market will increase by a total of six percent. That corresponds to additional capital of around 20 billion euros.
No disadvantages for consumers
Business and consumers do not have to worry about the credit supply in Germany, assured Wuermeling: “The credit supply in Germany will not be affected by Basel III.” Overall, “enough capital is available in the system to meet the needs of consumers, and especially small and medium-sized businesses”. Corporate financing would not become more expensive.
The Deutsche Kreditwirtschaft (DK), the umbrella organization of the five major banking associations in Germany, expects “significantly rising costs of equity” for Europe’s banks. “This will not remain without consequences for the European economy,” said Karl-Peter Schackmann-Fallis, board member of the German Savings Banks and Giro Association (DSGV). “It is to be feared that part of the lending business will migrate from the banking sector to less regulated areas.” The DSGV is in charge of the DK this year.
“The new banking rules strengthen financial stability in Europe,” said MEP Sven Giegold (Greens). His CSU colleague Markus Ferber warned against it: “We have to be very careful that the new capital requirements for banks do not turn off the credit supply for European companies.”
Lessons from the Wirecard scandal
The EU Commission is also drawing lessons from the Wirecard scandal: bank supervisors should be given additional tools to regulate fintech companies. “Every fintech company with a banking component must be regulated and monitored as such,” said McGuinness. The now insolvent payment service provider Wirecard has allegedly committed fraud amounting to billions for years without the German financial supervisory authority Bafin or auditors noticing.
The schedule for the “Basel III” rules, which bankers also refer to as “Basel IV” because of their size, had been stretched several times. The implementation was originally supposed to start in 2019, then a step-by-step introduction from January 1, 2022 was planned. Because of the coronavirus pandemic, the supervisors granted the institutes a further year postponement. It will now be years before the rules in Europe take effect in their full severity.
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
