The European Commission has at last adopted its long-awaited proposal to strengthen the European banking sector through stricter capital requirements and better liquidity management, obliging the EU’s banking institutions to hold more and better quality capital to prevent the markets drying up in times of crisis.
The product of the Commission’s efforts can be seen today in the form of a Regulation and a Directive, which should be considered together as one package. As Mario Nava, the Commission official leading the drafting process, has pointed out, the best way to achieve a Single Rulebook in the EU is through a Regulation.
Mirroring Basel III, the Regulation requires banks to hold 4.5% of Minimum Tier 1 Capital in 2013, which will be gradually increased until it reaches 6% in 2019. In addition, banks will need to hold onto an additional 2.5% in the Capital Conservation Buffer, as well as to a Countercyclical Capital Buffer between 0% and 2.5%, which is to be determined at national level.
Cicero Brussels Senior Associate Tim Gieles commented:
“European Commissioner Michel Barnier has been accused of being both too soft and too hard in implementing Basel III. European banks say the requirements are too tough and will prevent banks from lending. The European Banking Federation (EBF) said it welcomes the Single Rulebook for banks, but has concerns about the impact of the liquidity provisions on bank lending.
However, although the Regulation notes that nothing prevents institutions from holding more capital, national Member States may not impose stricter rules. Avoiding regulatory arbitrage is Barnier’s concern. Some Member States including the UK, Sweden and Spain have on the other hand stated that maximum harmonisation is not the aim of the CRD, and instead they call for more flexibility in the implementation of CRD IV.
A political observation can also be made about CRD IV: the lack of reliance on external credit assessments. Indeed, the vast majority of the Regulation prescribes how banking institutions should develop their own models to calculate their exposures in their portfolios, and this forms the basis for determining their minimum capital requirements. The role and activities of Credit Rating Agencies (CRAs), as we know, will be further addressed by legislation in autumn of this year, but today’s proposals already encourage banks to carry out their own analysis of risk, rather than relying automatically on external ratings.”
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