EU pledges faithful application of global bank capital rules

The European Union published draft laws to faithfully implement the final batch of tougher global bank capital rules from 2025. After the initial rules, banks in Europe hold roughly triple the amount of capital that they did in the run up to the 2007-09 global financial. Brussels says that its proposals would modestly increase capital requirements. Banks on the other hand argue that the hit will be bigger in practice.

The European Parliament and EU states have the final say on the European Commission’s proposals. European Commission Executive Vice President Valdis Dombrovskis said that they are faithfully implementing the agreement on Basel III. They also ensure that it does not lead to a significant overall increase in capital requirements. The EU’s executive European Commission is proposing to start rolling out the changes from January 2025. The Basel Committee of global banking regulators, agreed to a 12-month delay.

Dombrovskis said a further delay was realistic. EU is still ahead of Britain and the United States in publishing proposals. The Bank of England and commercial banks have called for global alignment on timing. Michael Lever, head of prudential regulation at European banking lobby AFME said that they welcome the Commission’s intention to extend the implementation date for the proposal until 1 January 2025. Banks worry that despite a delay, investors will want lenders to comply sooner rather than later.

Bigger banks will be allowed to continue using their own models. But a new floor sets a lower limit on capital from models. Banks says that the floor duplicates capital buffers imposed by national regulators. Brussels on the other hand rejected an industry workaround, noting safeguards to avoid duplication. The impact of the floor specifically on loans to companies will be phased in over five to eight years.

EU guidance on how banks should disclose enviromental, social and governance (ESG) risks. Banks fear regulators will impose a bespoke capital buffer to cover such risks. The proposals also harmonise a patchwork of rules on how branches of foreign banks in the EU are regulated. This is by introducing common approaches to supervision and authorisation. This is a first step to the forced creation of more expensive subsidiaries.

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