EU eases bank capital rules as ECB cites instability

Despite the European Central Bank’s warnings that it runs the risk of “breaking the barrier” that safeguards stability, member states of the European Union have supported a temporary relaxation and a two-year delay of the final phase of the internationally agreed Basel III banking capital rules until 2025. Now, the European Union’s member states will discuss a final agreement with the European Parliament in early 2023, with potential revisions.

“One of our main objectives is to avoid impacts on European banks that could reduce their ability to finance the European economy,” Czech Finance Minister Zbenik Stangora said during a meeting between EU finance ministers on Tuesday.

Basel III, a set of more stringent capital requirements put in place for banks following the world financial crisis more than ten years ago, has already been put into effect to a large extent. “It shows once again our commitment to international standards and multilateral cooperation,” said Valdis Dombrovskis, Executive Vice President of the European Commission.

The package achieved “the right balance,” according to the finance ministers of Germany and France, and Spain added that it captured “the peculiarities” of the European banking industry. “This flexibility gives banks enough time to adapt to these new rules,” German Finance Minister Christian Lindner noted.

European banks have made a strong case for the temporary relaxation of parts of the Basel III standards, claiming that they currently have adequate capital and that stricter guidelines will prevent them from lending to the economy.

Due to the negative economic effects of COVID-19, EU ministers decided to postpone the implementation of the final rules until January 2025. Analysts predicted that the updated regulations would delay implementation until 2032, effectively neutralising capital rises for those banks that specialise in low-risk mortgages. However, investors would find it challenging to compare European banks to those of other regions of the world.

EU nations that house banks with their main offices elsewhere in the union might demand that a part of the group’s capital be retained locally based on a new “production floor” for establishing capital levels. Simple disclosure would be advantageous for smaller banks, and EU nations have scaled back efforts at stricter EU coordination to guarantee that senior bank staff are “fit and proper.”

Since banks’ fenders had previously exceeded minimum norms, Standard & Poor’s stated last year that the loosened standards would not materially harm credit ratings and may even increase dividends and other payouts.

The demand for foreign banks to form subsidiaries with more capital and the associated EU control has decreased as a result of EU member states’ relaxation of commission plans to tighten regulations on foreign bank branches operating within the union.

Luxembourg noted that the action meant that the EU economies would have an “open economy” with more varied sources of funding. The loosening comes in spite of warnings last week from the European Central Bank, which oversees the main lenders in the eurozone, and the European Union’s banking watchdog, which claimed that the bloc might violate international laws.

According to the EBA, banks in the European Union as a whole only required an additional 1.2 billion euros to completely comply with Basel III by 2028.

However, Luis de Guindos, vice president of the European Central Bank, warned ministers on Tuesday that he was concerned about Basel 3 deviations at a time when the economy of the European Union is at risk.

“Each deviation may appear only as an isolated crack in the dam that protects the banking system, but these many cracks combined are eroding safety and stability,” de Guindos said.

The Netherlands stressed the need for temporary variances to stay that way. In selecting how it wants to implement Basel III’s final phase, the European Union has made more decisions than either the United Kingdom or the United States.

Although they won’t quite match some of the facilities permitted in the European Union, the Bank of England announced it will begin applying the rules in 2025. Given the substantial presence of US investment banks in London, the Bank of England will probably closely monitor the Fed’s decision.

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