New bank rules for Europe... towards regulatory competition with the US?
A complete new set of bank rules for Europe
The European Commission presented an extensive set of new bank rules, long expected: proposed amendments to EU banking sector legislation, specifically the CRR/CRDIV, the BRRD and the SRM regulation (see the press release, the Q&A and the full package of reforms – most of which was revealed in leaked documents (Here, here, here, here, here, and here). Fiona Maxwell provided a complete report. The proposals concern the following:
The revised Capital Requirements Regulation and its related fourth Directive (CRR and CRD IV)—to take into account internally agreed Basel Committee on Banking Supervision rules, including the leverage ratio, the net stable funding ratio, total loss absorbing capacity (TLAC), and the fundamental review of the trading book.
The revised Bank Recovery and Resolution Directive (BRRD). The BRRD governs bail-in rules, putting banks’ creditors in the firing line for losses, instead of taxpayers, and is being reviewed to take into account loss-absorbing debt rules and minimum requirement for banks’ own funds and eligible liabilities.
The Single Resolution Mechanism Regulation (SRMR). The SRMR implements the rules found in BRRD as a binding regulation.
a (more unexpected) separate creditor hierarchy proposal.
The actual measures announced (see EuroIntelligence) are:
A binding 3% leverage ratio (LR) to prevent institutions from excessively increasing lending when they do not have enough capital;
A binding detailed net stable funding ratio (NSFR) which will require credit institutions and systemic investment firms to finance their long-term activities (assets and off-balance sheet items) with stable sources of funding (liabilities). This aims to increase banks' resilience to funding constraints;
The adoption of new standards on the total loss-absorbing capacity (TLAC) of global systemically important institutions (G-SIIs), to strengthen the EU's ability to resolve failing G-SIIs while minimizing risks for taxpayers;
A requirement to have more risk-sensitive own funds (i.e. capital requirements) for institutions that trade in securities and derivatives, following Basel's work on the ‘fundamental review of the trading book' (FRTB).
More will be issued on the Capital Markets Union project, a proposal on insolvency, and proposals on the recovery and resolution of clearing houses (more here).
Reactions to the proposed reforms were mixed (Politico): Wim Mijs (European Banking Federation) calling for more ambition when it comes to creating jobs and growth in Europe through an efficiently regulated single market for finance, Michael Lever (AFME) welcoming this significant piece of the global financial reform program in Europe, Levin Holle (Germany’s Federal Ministry of Finance) calling for more risk reduction. Approval of the proposals will likely be difficult (EuroIntelligence): Sven Giegold MEP (FT) argues that the Commission's proposal unduly limits the supervisors' ability to require that banks issue more capital, France and Italy saying that European regulation should not be tougher than the international one, Germany unhappy (story).
US-EU regulatory competition?
US bank stocks have performed strongly since Trump’s election, on expectation of looser regulation (Wall Street Journal). In what is seen as a retaliation, the European Commission is expected to unveil provisions that mirror controversial U.S. ‘intermediate holding company’ rules that ringfence foreign bank capital (Financial Times). The proposal would require a non-EU bank with more than one EU subsidiary to set up a holding company subject to EU capital requirements. In case this "intermediate parent undertaking" qualifies by itself as a globally systemic, or if it is larger than €30bn in assets, it would then become subject to the European version of the Basel Committee's total loss absorbing capital (TLAC).
For EuroIntelligence, this "ringfencing" serves two functions: making it easier for the EU resolution authority to get a handle on the recovery and resolution plan - or living will - of an internationally active bank, and (ii) providing a single point of entry for the European supervisor SSM, by creating a level of accounting consolidation between potentially several European subsidiaries and a single large non-EU parent. The impact of Brexit is clear: the UK becomes a third country, an internationally active bank may need to hold three capital and liquidity pools.
In addition, MEPs approved a motion for resolution calling on policymakers to ensure that final Basel Committee on Banking Supervision rules do not result in a significant increase in capital requirements and unfairly impact EU banks.
More to be done on the Banking Union
Benoit Coeure (in a speech) highlighted institutional shortcomings on the European deposit insurance scheme and the common financial backstop for the Single Resolution Fund. Stefan Ingves (Handelsblatt) (head of the Basle Committee) also calls for stricter regulations, saying that some banks in Europe have severe problems that remain unfixed because of political reasons.
This warning comes with evidence that eurozone banks are becoming more fragmented—as described in an ECB report, that worry about their increasing exposure to domestic shocks.
