Bank Watchdogs Resist EU Industry Push to Derail Stricter Rules

Top banking watchdogs are warning European Union lenders to stop resisting new rules or risk weakening the financial system and undermining the bloc’s role defending global accords.

The clash comes as negotiations on stricter global capital rules move into a decisive phase in the EU. Lenders and regulators are jockeying to be heard by officials at the European Commission, who are gearing up to propose how to implement the new standards in the fall ahead of their slated start in 2023.

Banks are particularly worried because the rules, known as Basel III, would hit them harder than their U.S. counterparts. While the American economy and its lenders are starting to recover from the pandemic crisis, European bank executives say they’re grappling with a more sluggish rebound, burdened with negative interest rates, and shouldn’t have to deal with another handicap.

The head of the Basel Committee on Banking Supervision, though, says the timing of the push back from lenders on the new standards is inappropriate and contradictory.

“What I hear lately from banks is that they want greater global convergence when it comes to things like climate risk,” Pablo Hernandez de Cos said in comments to Bloomberg News. “Banks cannot insist on global convergence in one area, while demanding local accommodations and deviations in another.”

Bank Watchdogs Resist EU Industry Push to Derail Stricter Rules

He also said banks’ attempts to delay and even weaken Basel III could undermine the EU’s reputation as a defender of multi-lateral agreements just as the new U.S. administration under Joe Biden has pledged greater global cooperation.

“It would be highly unfortunate and extremely bad timing for Europe to retreat from its commitments to agreed global standards, especially in light of recent renewed engagement by other major jurisdictions,” said Hernandez de Cos, who is also a European Central Bank policy maker and governor of the Bank of Spain.

Bank of France Governor Francois Villeroy de Galhau weighed into the debate on Wednesday, echoing Hernandez de Cos and telling French lawmakers that they should ignore banks’ warnings.

The Basel guidelines agreed upon in 2017 represent “the best possible accord for our country and Europe,” Villeroy said. “Questioning that today would be all the more incomprehensible as financial multi-lateralism stood the test of the Trump years and is now reinforced by the Biden administration.”

He also rejected banks’ claims that the standards could hurt lending and suggested the effects won’t be a blow to their shareholders.

“I want to highlight that this increase will not require any capital increase or change in dividend policy for any French bank,” Villeroy said.

Still, the new standards will result in a higher bar for banks. They could drive up capital requirements by 19% and result in a 52.2 billion-euro ($63.9 billion) shortfall, according to a study by the European Banking Authority that used data from the end of 2019.

Banks want to keep that to 10% or less and are demanding to maintain leeway in judging the riskiness of companies that don’t have credit ratings. Regulators may be less inclined to allow such latitude after the recent Archegos Capital Management and Greensill Capital scandals exposed the limits of several banks’ ability to gauge their own risk.

Banks, having already lobbied aggressively in advance of the 2017 compromise, are also pushing to continue with existing rules and reduce the updated Basel standards to little more than an additional financial disclosure.

“We are committed to implement those reforms in a broadly faithful manner,” Martin Merlin, a senior Commission official for banking, said at a conference this month. “We cannot regulate in a vacuum and we need to take into account the present context, the Covid 19 context.”

For Andrea Enria, the ECB’s top supervisor, the pandemic isn’t a reason to slow the process. He argues that the 2020 recession showed that better-capitalized banks can handle unprecedented economic shocks, and so Europe must push on with the reforms.

“The last lap of this long process is still facing fierce opposition from some in the banking industry,” he said this month. “We do not see any benefits in further delays.”

©2021 Bloomberg L.P.

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