The Blog Financial reform for EU citizen
Bank regulators and supervisors have taken a number of important measures over the past two weeks in reaction to the coronavirus crisis. In our view, those measures make a lot of sense in the current fire-fighting context. We consider that the two priorities of bank regulators and supervisors should be 1) to ensure that credit is extended to enterprises during these extremely challenging times, and 2) to preserve financial stability. This is precisely what they are doing: the measures taken have to be analysed together and, seen through that lens, they show a high level of coherence.
Among those measures, the most noteworthy are:
- Excluding from non-performing loans credit extended by banks to support enterprises facing liquidity difficulties and benefiting from state guarantees.
- Comment: this is the best way to resolve the impossibility that banks would have otherwise to support the economy without endangering their own stability. It is the reason why states extend such guarantees, it is without doubt a clever use of public money, and it is indispensable that supervisors should exclude those state-guaranteed loans from non-performing loans accounting while controlling simultaneously the level of interest charged. This, obviously, does not preclude the more general objective of reducing non-performing loans on banks’ balance sheets.
- Bringing forward a measure allowing to partially use capital instruments that do not qualify as CET1 capital to meet the Pillar 2 requirements, which releases effectively euro 120 billion of capital for banks, potentially converting into euro 1800 billion of additional credit to the economy.
- Comment: this measure is coherent given the current crisis context, and it is the best proof that requiring higher capital requirements from banks, as has been the case over the past ten years, was the right thing to do. The only reason why some leeway can be given to banks during this crisis is that we are starting from a higher base than in the previous crisis and that banks are therefore stronger. If anything, this is a demonstration that the pseudo-economic arguments that banks’ lobbies have been rolling out against higher capital requirements for years were not only of no value but also detrimental to the public interest and to the economy.
- Asking banks not to distribute dividends in 2020, which could represent an amount of about euro 30 billion for banks under SSM supervision, and to show “extreme moderation” in the payment of bonuses.
- Comment: this is coherent with the necessity not to diminish the capital base of European banks and with the measures releasing the pressure on building up that capital base (point above): the objective of releasing the pressure on banks’ capital is to support the economy through additional credit, not to make additional distributions. It has to be noted though that, in our understanding, this constitutes a recommendation from the ECB/SSM but not an obligation, as such an obligation could only come as an application of the so-called Pillar 2 Maximum Distributable Amount (MDA) rules.
- Delaying the finalisation of Basel III by one year.
- Comment: Finance Watch has always been, and still is, in favour of finalising Basel III. Having said that, delaying the implementation of the Basel III framework by one year is a pragmatic response to a context where the ability of banks to increase their capital base either from retained earnings or from capital increases is far from being clear in the current context: if applying a rule is not technically feasible, or at least unclear, one might as well delay its implementation. Finance Watch will however insist that the Basel III framework be finalised when things return to normal, if anything because the coronavirus crisis demonstrates that starting from a strong capital base is indispensable to adapt and show flexibility in times of crisis.
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