These days, the final of banking regulation in Europe is on. More than a decade after the outbreak of the financial crisis, the task is to complete the major project, which runs under the awkward abbreviation Basel III. As always in a final, the fighting is fierce until the last minute. The banks have used the interruption in play caused by the Covid crisis to reform their resistance. On the other hand, the overseers have made it clear that they insist on strict implementation of the controversial rules.
The clear lines of conflict create a certain tension and are very significant. Which, however, does not bring the topic of banking regulation to special programs after the main news on television. The subject is complex, and banks are anything but popular. There is a great deal at stake for Europe in the geostrategic competition with the USA and China. The tussle over Basel III shows that the EU and, above all, German politicians are still paying too little attention to the banks. There may be understandable reasons for this, but it is still negligent.
Back to the core of the debate: at the heart of Basel III is the idea of equipping banks with such thick capital buffers that they can cushion even severe shocks. The main aim of the final theses is to prevent the financial institutions from offsetting their risks through the use of internal models. A fear that worries the Americans above all.
In principle, this is spot on. No matter how strict and smart the overseers may be, it is next to impossible to predict in which corner of the global financial system the next crisis is lurking. That’s why banks need to be robust enough to withstand the next quake, no matter where the epicenter is. For this reason, 25 heads of European central banks and supervisory authorities have written to the EU Commission calling for full, fast and strict implementation of the Basel III capital rules.
Top jobs of the day
Find the best jobs now and
be notified by email.
The banks in Europe and Germany see it a little differently. They warn that significantly higher capital requirements limit their potential to grant loans, and that this is poison for the economy in the build-up phase after the Covid shock. The banking lobby is happy to point out that the institutes in the pandemic were not part of the problem, but part of the solution. That proves that the system is stable and that even stricter rules would be counterproductive.
An indirect rescue program for the banks
In fact, the banks got through the Covid crisis much better than many supervisors feared. But that is at best part of the truth. This time, too, at least indirectly, the banks benefited from a rescue program: The enormous state aid to combat the economic consequences of the pandemic prevented a wave of bankruptcies among companies and thus greater distortions in the bank’s balance sheets.
In addition, there is much to be said for the thesis that it was precisely the stricter regulation that prevented a crisis of confidence in the banking sector at the beginning of the pandemic. What would the reaction of the market have been if the banks had stumbled into the pandemic with similarly thin capital buffers as they had stumbled into the financial crisis in 2006?
So there are good reasons for supervisors and politicians to stick to pure teaching in the final in the direction of Basel III.
On the other hand, this does not take place in an ideal global economy determined by free competition, but in an increasingly fragmented world dominated by national interests. Sovereignty and autonomy have played an even bigger role since the pandemic. That is why the banking lobby has a point when it warns that Europe must not make itself dependent on global banks. Here, too, it helps to remember the financial crisis. It showed that financial markets quickly become national when the going gets tough.
Completion of the banking and capital markets union
One can understand that so far there have been few incentives for politicians to take loving care of the banks. After all, the number of jobs is manageable compared to other industries – and there is also the original sin of the financial crisis. But in a region with a weak capital market like Europe, banks play a central role for every part of the economy as distributors of the funds for the digital and ecological major restructuring.
That is why Europe needs an industrial policy for the banks, especially when the regulation is as strict as it currently looks. This includes not only the often invoked completion of banking and capital markets union, but also the free flow of capital and liquidity within a financial group, better securitization options and the most uniform insolvency and consumer protection rules possible.
More: New Bafin boss: “The greatest economic risk is the interest rate environment”