Banks Seeking Softer Capital Rules Rebuffed by EU Regulator

(Bloomberg) -- European banks lobbying for special treatment on new capital rules are in for a disappointment.

The European Banking Authority said the bloc should stick closely to what was agreed at a global level when it implements new regulations in the region, according to a report published on Monday. It specifically rebuffed suggestions from banks on how to tailor the rules to limit any increases in capital requirements.

Slowing economies and the prospect of ultra-low interest rates for years to come have prompted European Union banks to redouble their argument that new regulations will hit them harder than their U.S. peers and could lead them to pare back lending. So far, authorities have shown no inclination to soften the blow from capital reforms agreed in the Basel Committee on Banking Supervision.

The benefit of strictly complying with the final part of so-called Basel III rules “far outweighs” the limited capital benefits of allowing exemptions, the EBA said. “International standards are the foundation of a well-functioning global banking market,” it said.

Global regulators clinched a deal in 2017 on how banks must measure the risk of mortgages, loans and other assets on their books. Faced with a capital shortfall of about 135 billion euros ($151 billion), European banks have campaigned for exemptions from the global approach when the EU translates the reform into its own laws.

Societe Generale SA Chief Executive Officer Frederic Oudea recently wrote in an opinion piece that the EU should be “careful and sensible” in applying the rules because they would force banks to raise capital right as the economy “looks set for a downturn.”

Shares of European banks have fared worse than the broader market in the past few months on concern that they will suffer from a fresh round of monetary stimulus. The European Central Bank is reviewing options including another cut in the deposit rate -- potentially increasing the cost of banks’ liquidity reserves -- as the economic outlook for the currency area deteriorates.

“It’s surprising that the significantly higher capital demands are being trivialized as a desired side effect,” Christian Ossig, chief executive of the Association of German Banks, said in a statement. “The new capital requirements are hitting the European economy in a moment of great uncertainty.”

European banks lobbied hard against the final piece of Basel III in the run-up to the global agreement in late 2017. They were successful in watering down some of the rules, which resulted from the financial crisis a decade ago and are meant to increase the reliability of the statistical models banks use to measure asset risk.

The EBA’s recommendation was made as part of advice to the European Commission, the EU executive arm that will be responsible for the legal proposal implementing the Basel framework.

To contact the reporters on this story: Alexander Weber in Brussels at aweber45@bloomberg.net;Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Marion Dakers

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