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Finance Watch challenges bank lobby arguments for lowering capital requirements

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Finance Watch publishes a critical analysis of a recent report commissioned by the European Banking Federation on the EU implementation of the final Basel III framework.

Brussels, 11 December 2019 – The public interest association Finance Watch released today its memo “How can safer banks hurt the EU economy?” in response to arguments developed by the European Banking Federation to impede the finalisation of the Basel III framework. It aims at balancing the public debate around the importance of sufficient capital requirements for the benefit of European societies and economies.

Fundamental questions raised by Finance Watch about the report from Copenhagen Economics commissioned by the European Banking Federation:

  • Level playing field between US and European banks: where is the surprise in the fact that an output floor that sets a floor for capital requirements calculated under internal models at 72.5% of those required under standardised approaches has more impact on European banks than on US banks, given the fact that US banks are already effectively subject to an output floor at 100%? Isn’t the uneven playing field between US and European banks playing today in the direction opposite to the one suggested by the European Banking Federation?
  • Lending to the economy: why should banks decrease the amount they lend to the productive economy when they are subject to higher capital requirements, given the very gradual approach to the finalisation of Basel III (2027) and the already low proportion of their consolidated balance sheet dedicated today to financing the real economy?
  • Raising capital: how can a one-off capital increase of banks lead to a permanent decrease of GDP of the same order of magnitude, in particular given the fact that most banks will be able to increase their capital through retained earnings?
  • Cost of a financial crisis: on what basis can it be justified to quantify the cost of financial crises as a “moderate” 0.6% of GDP given the impact on public budgets and the enormous social cost of the crisis of 2007-2009?

Thierry Philipponnat, Head of Research and Advocacy of Finance Watch, said:

Besides the many questions the report by Copenhagen Economics raises, an important breakthrough must be noted: by endorsing the report, the European Banking Federation recognises the existence of too-big-to-fail banks and of the financial advantages that this status brings. This recognition has important policy implications and it should feed a much-needed cost/benefit analysis of the relationship between the banking sector and society at large.”

Benoît Lallemand, Secretary General of Finance Watch, said:

Finance Watch would be happy to engage with the European Banking Federation in a debate about the fundamental questions raised in the report of Copenhagen Economics. This is, we believe, important for the quality of the public debate and for sound policy-making. Ten years on from the biggest financial crisis in a century, we cannot leave these questions unanswered.

ENDS

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NOTES FOR EDITORS

On November 22nd, Copenhagen Economics came out with a report written for the European Banking Federation on the EU implementation of the final Basel III framework.

The same day, the Financial Stability Board published its 2019 list of Global Systemically Important banks, amounting to 30 banks, one more than last year.

On November 29, the Financial Stability Board released its SME financing evaluation report. According to Klaas Knot, FSB Vice Chair and President of De Nederlandsche Bank, who led this work, “the evaluation provides robust evidence that the post-crisis financial reforms have not led to a material and persistent reduction in SME lending. Indeed, the stronger financial system created by the reforms provides a firm foundation to support SME growth over the long term.”

On December 4, the European Banking Authority published the second part of its advice on the implementation of Basel III in the EU, confirming Finance Watch’s response to Copenhagen Economics: “The long-term benefits are substantial and outweigh the modest transitory costs. The reform would mitigate the severity of future economic downturns through a reduction in both probability and intensity of future banking crises, leading to sizable long-term net benefits of around 0.6 percent of annual GDP level.”

Further Finance Watch publications on the topic:

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