Today, the European Commission has presented its proposals to review current EU banking legislation (CRR, CRD, BRRD, SRMR). The review is meant to transpose new internationally agreed Basel rules, to provide clarifications for existing EU legislation and to reflect the needs for enhanced proportionality. The Commission proposals will now be discussed in the European Parliament and Council, before these co-legislators will work on finding a compromise.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The minimum approach proposed by the Commission is not sufficient. The financial system continues to be overly complex and some systemic banks are still thinly capitalised. We welcome the disclosure of SREP add-ons, a Leverage Ratio minimum requirement of 3% as well as the limitation of interbank loans for G-SIIs.
Attempts to limit the discretion of supervisors and exclude macro-prudential risks from their assessment endanger financial stability and put European taxpayers’ money at risk. The lowering of Pillar 2 requirements by introducing non-binding capital guidance is a generous gift to large banks. By allowing payouts for AT1 instruments in a situation where regulatory capital levels aren’t met, the Commission is undermining the liability principle of the market economy for the banking industry. The new rules would also cut the wings of the resolution authorities including Elke König’s SRB. Putting constraints on resolution authorities is dangerous as the new TLAC requirement is weaker than the current EU legislation under MREL.
To overcome the problems of too-big-to-fail and too-interconnected-to-fail, Europe needs more ambitious reforms. It is not acceptable that the Commission gave in on pressure from the financial industry to deviate from Basel rules by softening derivatives treatment when calculating LR and NSFR.
On top, regulatory requirements have to be tailored for the different business models and risk profiles of European banks. We need a real ‘small banking box’ to lower the administrative burden especially for small and non-risky banks. The harmonization of European and national regulatory reporting obligations would create an European added value. In the upcoming negotiations with the Council, we will fight for significant simplifications for small banks while insisting on strict rules for systemically important banks.”
The detailed Commission proposals will only be published during this week but we were able to already retrieve the most important changes. In line with Basel, the Commission is proposing a binding leverage ratio of 3% for all EU banks and a total loss absorbing capacity (TLAC) of 6.75% of leverage exposure for systemically important banks (G-SIIs). In a nutshell, introducing TLAC for the biggest banks means lowering the current EU minimum requirements for own funds and eligible liabilities (MREL) of 8% of total liabilities. As derogation from Basel, the Commission foresees a softer treatment for derivates when calculating Leverage Ratio and NSFR. According to Commission draft papers, large exposures between G-SIIs shall be limited to 15% of own funds. While the institution-specific capital surcharges (SREP) shall be disclosed, competent authorities are no longer allowed to include macro-prudential risks in the calculation of Pillar 2 add-ons. Likewise, the Pillar 2 requirement is split into a hard Pillar 2 capital requirement and a soft Pillar 2 capital guidance whose breach does not automatically result in pay-out restrictions. The discretion to set bank-specific additional capital requirements is limited both for supervisors setting SREP surcharges and for competent authorities defining MREL exceeding the TLAC minimum. Small institutions shall benefit from a lowered frequency for regulatory reporting and reduced Pillar 3 disclosures.
Commission draft papers leaked:
The final Commission proposals will be published during this week: