Brussels, 16 April 2019 – The European Parliament today has adopted a weak banking package that will not materially improve the resilience of European banks and is likely to hinder rather than help the resolvability of distressed banks, observes the public interest NGO Finance Watch. On the positive side, large banks will be required to disclose environmental, social or governance related risks to better assess their financial stability.
Christian Stiefmüller, Senior Research and Advocacy Advisor at Finance Watch, said:
“The EU legislators have gone about the adoption of the most recent international standards with a barely concealed lack of enthusiasm, especially in the core area of capital requirements. Policymakers have let themselves be convinced, once again, that European banks should be run on a shoestring with capital at three pence to the Pound.”
Benoît Lallemand, Secretary General of Finance Watch, added:
“The inclusion of sustainability requirements for banks is one of the few positive points added to the Banking Package, two and a half years after it was first unveiled by the Commission.
“Overall, this Banking Package represents a missed opportunity to continue and complete the regulatory effort that took place in the first half of this decade when memories of the devastating twin crises of 2007-09 and 2010-12 were still fresh. The outgoing Parliament is leaving behind a mixed bag of timid progress and resolute backsliding.”
The Package is a comprehensive re-write of the EU’s three main legislative pillars in the field of banking regulation, the Capital Requirements Regulation (CRR), Capital Requirements Directive (CRD), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR).
Finance Watch regrets the lack of ambition to improve the resilience of banks’ balance sheets:
- Leverage ratio: The adoption of a binding, risk-neutral Leverage Ratio (LR) at a level of 3% made it practically meaningless and will not be effective at compensating the flaws in the risk-weighted asset (RWA) calculations and bank’s internal ratings-based models (IRB) at the core of the risk-based Basel III framework, which are highly susceptible to subjectivity and manipulation.
- TLAC standard: The capacity of banks to absorb losses and recapitalise themselves without recourse to external funds has been compromised by deviations, in particular regarding the requirement for liabilities that may be subject to bail-in to be subordinated to regular unsecured creditors. The lack of a clear and credible subordination regime is bound to render bail-in more difficult, even impracticable at the point of resolution, when it is most needed.
- Regulatory discretion: By confirming the splitting of Pillar 2 capital requirements into a binding “requirement” and “non-binding” guidance, a controversial practice applied by the ECB since 2016, large banks’ binding core equity requirements reduced by more than 20% in one fell swoop. Similarly, the tight constraints on the discretionary autonomy of resolution authorities when setting the Minimum Requirement for Eligible Liabilities (MREL) are likely to hinder rather than help the resolvability of distressed banks.
- Credit risk supporting factors: Lower risk weights for loans to SMEs and infrastructure projects are meant to channel loans towards parts of the economy that are considered currently underserved. In the best case, these “support factors” amount to subsidies to the banks for writing business that they would have taken on anyway. In the worst case, they may undermine lending standards and encourages banks with weak risk controls to lend to companies and projects of doubtful credit quality. Supervisory authorities and central banks have better tools to help channelling credit towards SMEs, infrastructure and other productive activities such as credit ceilings, quotas, TLTRO or “Funding for lending” schemes.
Meanwhile, Finance Watch welcomes the introduction of sustainability requirements in the Capital Requirements Directive and Regulation (CRD/CRR) related to Environmental, Social and Governance (ESG) Risks:
- Mandatory disclosure of ESG-related risks, physical risks and transition risks: The introduction of the requirement for large banks to disclose ESG-related risks, physical risks and transition risks is essential for being able to evaluate the resilience of the banks to different climate scenarios and so should be an additional tool in the context of financial stability assessments. Banks will only be required to disclose ESG risks in three years’ time.
- ESG criteria for the supervisory review and evaluation: The European Banking Authorities (EBA) has two years to define Environmental Social and Governance (ESG) risks which is necessary for the mandatory disclosure as mentioned above. They will also make proposals for risk management processes that are related to these ESG risks. This could lead to new guidelines for the inclusion of ESG risks in a next supervisory review. This is particularly welcome given that today no concise and comparable indicators are available for comparing banks’ level of exposure to transition or physical risks.
- Green or Brown Supporting Factors: The EBA will also assess whether the different capital charges for “green” and “brown” assets (penalising factors for assets posing environmental risk) would be justified from a prudential perspective. In the view of Finance Watch, a green supporting factor would only weaken banks, while higher risk weights for brown assets would strengthen banks and discourage lending for fossil fuel activities.
For further information or interview requests, please contact:
Charlotte Geiger, Senior Communications Officer at Finance Watch, at email@example.com or at 0032/(0)474331031.
NOTES FOR EDITORS
The so-called Banking Package is a comprehensive re-write of the EU’s main legislative pillars in the field of banking regulation. It had been billed as a necessary update to incorporate the most recent international standards, in particular the latest iteration of the Basel III framework, issues by the Basel Committee on Banking Supervision, and the Total Loss Absorbing Capacity (TLAC) of the Financial Stability Board (FSB).
In November 2016, the European Commission adopted a set of proposals.
In June 2017, Finance Watch has published a detailed policy brief with comments and recommendations on the EU’s banking package: “One step forward, two steps back”.
In December 2018, the European Parliament and Council reached an agreement.
On 16 April 2019, the European Parliament approved the reports to amend the Capital Requirements Regulation (CRR), the Capital Requirements Directive (CRD IV), Single Resolution Mechanism Regulation (SRMR) and Bank Recovery and Resolution Directive (BRRD).