European Commission moves to implement Basel III

Today European Commissioner Michel Barnier announced the adoption of two legislative proposals to transpose the Basel III framework into European legislation.

The proposals, part Regulation, part Directive, amend the current Capital Requirements Directive (CRD) to include higher quality of capital, strengthen risk coverage, mitigate pro-cyclicality and increase liquidity requirements for the banking sector. However, one of the most alarming consequences will be the negative impact that these proposals will have on the capacity of banks to lend to SMEs – one of the core activities of ESBG's members.

Whilst ESBG supports the European Commission's adherence to its G20 commitments to implement the Basel III framework, this implementation needs to be carried out with great caution. The Commission’s decision to implement the majority of Basel III’s provisions in the format of a Regulation signals Europe’s pledge to ensure that the new provisions directly apply to all credit institutions. Nonetheless, ESBG is concerned that the format of this legislative package fails to take national specificities into account, ultimately leading to severely detrimental consequences for specific business structures, such as savings and regionally oriented retail banks, which proved their resiliency during the financial crisis.

Furthermore, a lack of consideration for national specificities in relation to the new rules will ultimately result in irreparable damage to numerous ESBG’s members, in particular regarding their ability to adhere to the new and more stringent capital requirements. Indeed, until now, ESBG's members have succeeded in financing the economy through the building of specific business models. These models, however, now risk being put into question as a result of the new rules. Moreover their access to capital and their funding would require adaptations, which risk making it more difficult for them to pursue their original activity of financing the economy.

In addition, regarding the new liquidity requirements, ESBG strongly urges the European Commission to fully utilise the observation period allocated by the Basel Committee concerning these measures, given their unprecedented and unexplored nature. In addition, the ability of credit institutions to exchange views with the European Banking Authority and the Commission throughout this period should be ensured.

ESBG shares the view of Commissioner Barnier in relation to many of the assessments he made during the press conference held today: that the European banking industry has to be ambitious in its transposition of the G20 commitments to strengthen the solidity of the European economy; that this review will have a fundamental impact on the activities and the behaviour of the banking industry; that the European economy needs to be financed by a banking sector which will be obliged to raise €460 billion to meet the new capital requirements.

Above all, we ardently agree this review has to be balanced due to its applicability to 8,200 European banks in comparison to a mere 20 in the United States and that applying common rules does not mean that national specificities should be ignored.

Yet, irrespective of the shared views outlined above, "the fundamental premise on which this review operates is flawed", commented ESBG's Managing Director, Chris De Noose, "it is a huge gamble for the European Commission to guarantee that imposing such requirements on the European banking industry will not harm the smaller and more regional financial institutions and that they will be compensated for their efforts by the trust clients regain in them. It is therefore of paramount importance that the diversity of ESBG’s membership and its closeness to the real economy, in particular to SMEs, is not only recognised in principle, but is also upheld in reality".

Source: European Savings Banks Group
Date: 20.07.2011 [302]