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2nd Mar 2024

New EU banking rules ignore 'stranded assets', critics warn

  • The EU on Wednesday gave banks until 2025 to further boost capital to prevent a 2007-type solvency crisis from recurring. (Photo: Skaja Lee)
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The final batch of new banking rules is set to be implemented in 2025, Valdis Dombrovskis told press on Wednesday (27 October) - two years later than agreed internationally, and following intense lobbying for postponement by French and German banks.

The Basel III reforms were initiated by the EU and the G20 countries following the financial market crisis of 2008-2009 to reduce the risk of another financial meltdown.

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These rules - now transposed into EU law - will force EU banks to set aside more cash reserves to cushion potential losses.

The European Banking Authority estimated that 10 major banks will need to raise €27bn to meet the new requirements - 89 banks already meet the conditions.

The directive also gives banking authorities, like the European Central Bank (ECB), more legal backing to push financial institutions to disclose and tackle climate change risk in their portfolios.

But critics say rules for voluntary risk disclosure as set out by Basel III rules are not enough to meet the hazard fossil fuel assets pose to the stability of the financial system.

"So long as fossil-fuel reserves underpin the stability of the banking sector it threatens both financial stability and encourages the use of technologies that cause climate change. The EU should use the tools available in the capital requirements regulation to give greater emphasis to the risks of banks exposure to fossil fuels," vice president of the economic and monetary affairs committee MEP Ernest Urtasun (Greens/EFA), said in a statement.

Existing risk models that are used by banks often underestimate climate risk.

As a result, banks do not set aside enough cash reserves in case an oil or gas project ends up as a 'stranded asset'. A stranded asset is a resource, or a piece of equipment, that has value now but will become worthless if countries move towards clean energy.

Last year banks invested nearly €900bn in the fossil-fuel industry, according to activist group Rainforest Action Network.

Since 2016 the 16 biggest European banks have collectively provided over €475bn to the fossil fuel industry.

Academics Adam Tooze, Ann Pettifor and Stephany Griffith-Jones published an open letter on Wednesday warning leaders that current banking rules do not take into account the danger climate change poses to the stability of the financial system.

According to these authors, all fossil-fuel investments should be backed-up 100 percent.

Under Basel III, the minimum capital requirement banks must maintain is eight percent.

"For each euro that finances new fossil-fuel projects, banks and insurers should hold a euro to guard against future risks," they write.

"Our message to banks and insurance firms is this: If you want to finance new fossil-fuel projects, do it at your own risk," Benoît Lallemand, secretary-general of the European NGO Finance watch, one of the signatories of the letter, said.

The open letter follows similar interventions from Chris Hohn, founder of The Children's Investment Fund, a €25bn hedge fund, and from former US vice-president Al Gore, both calling on leaders and banking authorities to raise capital requirements for fossil-fuel projects.

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