7th Dec 2022

EU earns 'fail' grade over bank capital regime

  • Italian bank Monte Paschi was one of 24 EU banks to fail October's stress tests (Photo: Michelle Lee)

New EU laws do not meet new global standards and would not be enough to ensure that the bloc's banks could survive a future financial crisis, according to a new report by the leading global bank regulator.

The rebuke is contained in a report published on Friday (5 December) by the Basel committee at the Swiss-based Bank for International Settlements, the body tasked with formulating the rules that govern the world's lenders.

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The committee, which also assessed the US, Japan, China, Brazil, Canada and Australia, finding them all in compliance, found that the new EU framework complied with the Basel rules in only eight of the fourteen areas.

The EU is the first international body to be given a 'fail' verdict by the Swiss-based regulator.

The EU's new rules on "counterparty credit risk", which deal with derivatives, were found to be 'non compliant' by the committee, as were "the treatment of exposures to SMEs, corporates and sovereigns."

The rule book governing four other areas were deemed to be 'largely compliant'.

The Basel committee cannot force the EU to re-write its laws, but the rebuke is embarrassing for lawmakers, who passed an updated Capital Requirements directive increasing the amount of capital banks must hold on their balance sheets in 2013, and have set great store in their various attempts to tighten regulation of the financial sector.

The new rules are designed to ensure that banks are more resilient and better able to absorb losses in the event of future financial crises.

Meanwhile, MEPs and ministers have agreed legislation on how to wind down insolvent lenders without seeking publicly funded bailouts and have tasked the European Central Bank with supervising the bloc's largest 200 banks.

Last month, EU bank regulators published the results of 'stress tests' assessing whether the bloc's banks would be able to cope with a future crash, finding that 24 banks were under capitalised by a total of €24.6 billion.

"EU banks are well capitalised," said the European Commission in a statement on Friday, adding that "EU banks are in practice required to meet capital ratios that exceed the legal minimum requirements".

It argued some that the Basel commitee's criticisms were a matter "interpretation".

"Some of the provisions portrayed as deviations could in fact be considered compatible with Basel III," it added.

Meanwhile, in a statement on Friday (5 December), the European Parliament's leading political groups said that they did not accept the Basel committee's report.

"The opinion of a body that is working without legitimacy and without transparency cannot modify the decisions taken by the European institutions", said leading deputies from the EPP, Socialist, Liberal and Green groups.

ECB takes control as EU bank supervisor

The ECB formally assumes its new role as the chief supervisor of EU banks on Tuesday, in a milestone for the creation of the bloc's banking union.

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