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24th Jan 2021

EU falling short on bank capital rules, warns regulator

  • Will EU rules make banking safer? (Photo: Wikipedia)

The EU is failing to meet international rules to make bank lending safer, according to the Basel Committee on Banking Supervision, an international body created in 1974 to come up with worldwide standards on keeping banks in check.

The committee gave the EU a clean bill of health on most of a draft law on capital requirements for banks (CRD IV), classifying 12 out of 14 components of the proposals as "compliant" or "largely compliant" with the Basel rules. However, it expressed concerns about the EU's definition of capital and the calculation of credit risk capital requirements.

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Stefan Ingves, the governor of the Swedish central bank and chairman of the Basel committee, which falls under the auspices of the Swiss-based Bank of International Settlements, said that EU lawmakers still had a “window of opportunity” to strengthen the rules, which will come into force in 2013. The committee has already praised Japan for its transposition of the new rules.

In a statement released on Monday (1 October) internal market commissioner Michel Barnier hit back at the regulator's criticism, saying that the Basel group's concerns “do not appear to be supported by rigorous evidence and a well-defined methodology.”

Barnier added that he is “confident that the final report of the Basel Committee will constitute an improvement both in the assessment of the EU and the coherence across jurisdictions.”

Ministers and MEPs are currently deadlocked in negotiations on the latest version of the Capital Requirements directive (CRD IV), with Parliament calling for tighter regulation of bank bonuses and a stronger role for the European Banking Authority. MEPs want to cap bonus payments so that they can be no higher than annual salaries.

The commission also ruffled feathers by refusing to allow countries to impose extra requirements on their banks. The UK government led a minority of countries arguing that the EU executive should allow member states to impose higher capital requirements.

Lawmakers in the EU and US have come under attack from the Basel committee, which co-ordinates international regulation on the financial services sector. The CRD reforms are aimed at putting an international agreement at G-20 level in November 2010 into EU law. The so-called Basel 3 agreement strengthens bank capital requirements by introducing a mandatory capital conservation buffer and sets new regulatory requirements for bank liquidity and leverage.

The collapse of Lehman Brothers in 2008 was partly blamed on banks over leveraging by making risky loans and then not being able to cope with the size of losses. Banks are currently required to hold just 4 percent of assets, with the Basel rules expected to increase this to almost 10 percent by the end of the decade.

Supporters of the reforms insist that it will make banks safer and less likely to require public bail-outs in future crises, while critics claim that it will force up the cost of borrowing.

The Paris-based think-tank, the Organisation for Economic Co-operation and Development (OECD) claims that the new rules will decrease economic growth by between 0.05 and 0.15 percent.

MEPs are expected to vote on the final text in Strasbourg within the next two months, with the legislation set to apply to over 8,000 institutions in Europe.

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