Brussels, Frankfurt The European Union is striving for a comprehensive tightening of financial regulation. “It’s about strengthening our banks, making them more resilient and future-oriented,” said the EU Commissioner in charge, Mairead McGuinness, in an interview with the Handelsblatt and some other business media. The Irish woman tried to dispel worries that the reform would make loans more expensive in Europe.
The occasion for the discussion was the presentation of the EU legislative package for the implementation of the internationally agreed Basel III regulations, which the Handelsblatt reported on last week. It is a “balanced and credible” reform that takes into account the specifics of the European banking system, said McGuinness. Contrary to what the banking lobby fears, there will be no “significant increase in capital requirements”. According to calculations by the Commission, the reform will increase the capital requirements for European banks by an average of less than nine percent by 2030.
“The new rules are designed so that the industry can handle it well,” said McGuinness. Before the reform can come into force, the Commission’s proposal has to be brought into line with the ideas of the European Parliament and the EU Member States. Implementation takes a little longer in Europe than in other economic areas. The EU wants to introduce the new rules gradually from 2025 – two years later than agreed in the Basel Committee on Banking Supervision.
The key points of the reform are the handling of the banks’ internal risk models and the handling of loans for companies whose risk profile is not assessed by a rating agency. In terms of the matter, Brussels does not make any compromises: Loans for the – often smaller – companies that have no rating could be more heavily burdened by the reforms in the future. In addition, the possibilities for banks to use their own models to calculate their risks and thus their capital requirements are limited.
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In order to mitigate the consequences of the innovations, however, a number of simplifications and long transition periods are planned. The Bundesbank expects that the minimum capital requirements for the German banking sector will only increase by six percent as a result of the new rules. “That corresponds to additional capital requirements of roughly 20 billion euros,” said Bundesbank board member Joachim Wuermeling.
Since most banks had significantly thicker capital buffers than prescribed by the supervisory authorities, the higher requirements were not a problem for them, said Wuermeling. “The higher capital ratios are easy to meet for most banks, but not for all.”
Deutsche Bank can live with new rules
The reactions from the banking sector varied. The Deutsche Kreditwirtschaft (DK), an amalgamation of the local banking associations, expects the reform to result in “significantly rising costs of equity” for the financial institutions, which will also have consequences for the European economy. “It is to be feared that part of the lending business will migrate from the banking sector to less regulated areas,” explained the DK.
Deutsche Bank, on the other hand, considers the effects of the new set of rules to be “very manageable” and therefore does not need to raise any additional capital by its own admission. With its proposal, the EU Commission has at least partially responded to the feedback from the financial sector and has taken into account the peculiarities of the European financial market, said CFO James von Moltke.
Gerhard Hofmann, member of the board of the Federal Association of Volks- und Raiffeisenbanken (BVR), made a similar statement. However, like the Green finance expert Sven Giegold, he would have liked more administrative relief for small and medium-sized banks. “It is urgently necessary to improve the proportionality of rules in the Basel III implementation,” said Hofmann.
In Germany, many also see the regulations for the assessment of credit risks of medium-sized companies with concern. Most of these companies are not rated by a rating agency – and are therefore afraid that the reform will increase their borrowing costs in the future. “We are aware of these concerns,” said McGuinness. The EU Commission has therefore taken precautions and does not expect the reform to become “a cost driver for small and medium-sized companies”.
A long transition phase is planned, during which there will be a de facto discount for SME loans. This reduced “risk weight” of 65 percent should only apply to companies that have a good credit rating from the banks’ point of view. The probability of failure should be a maximum of 0.5 percent. According to the Bundesbank, this special regulation was extended at the last second and is now to apply until 2032.
In order to prepare for the time after that, “we have instructed the European Banking Authority Eba and the European Securities and Markets Authority Esma to examine how rating coverage can be expanded in the EU,” said McGuinness. However, the legislative package does not provide for the establishment of its own European rating agency, which has been discussed again and again in recent years.
Basically, the Basel reform is likely to primarily affect larger banks and specialist financiers who rely heavily on internal models. At Sparkassen and Volksbanken, on the other hand, “everything stays the same,” says financial economist Sebastian Mack from the Jacques Delors Center in Berlin.
Different reactions from politics
In politics, the reactions were different. The Green politician Giegold praised the fact that McGuinness had not complied with the demands from France to weaken the reform. “With this, the EU Commission clearly rejects Emmanuel Macron’s demands for a softened implementation of Basel III.”
The CSU financial expert Markus Ferber sees the legislative package more critically. What the Commission has presented is “anything but a perfect fit for the European economy,” says Ferber. “We have to be very careful that the new capital requirements for banks do not turn off the credit supply for European companies.”
McGuinness also announced to tighten the requirements for branches of banks from non-European countries and to give the supervisory authorities new powers. “We looked at what was happening in the market,” said the Irish woman. “There is an increase in the number of branches and we need to understand if we need more controls to maintain financial stability.”
In addition, Brussels wants to pay more attention to sustainability and climate risks for the financial system in the future. On the one hand, the banks’ resilience should be strengthened – through adjustments to risk management. On the other hand, the reform should help banks to finance the green transformation of the economy. This is “crucial to the Green Deal agenda that Europe is pursuing to become climate neutral,” said McGuinness.
In this area too, supervisory authorities are to be “given more power” to examine how banks report climate and environmental risks. Climate change “poses a risk to financial stability if the problem goes unnoticed”. The point is to “gradually change direction” for the entire financial system, but just in time.
The legislative package does not provide for a bonus for “green” financing or a penalty for climate-damaging “brown” financing, as was discussed at times. However, the idea is not off the table. They should be discussed further. “The climate debate is evolving very quickly, the problem is becoming more pressing, so we may have to address this issue sooner,” said McGuinness. There should be a European proposal for this in 2023.
More: Strict rules, long transition periods: This is how the EU Commission wants to implement the banking reform from Basel