Sven Giegold

Capital requirements for banks: Relief needs to be complemented by obligations on bank investors

In the Corona crisis, the EU Commission wants to grant European banks far-reaching capital relief with a “CRR quick fix” of the capital adequacy rules. Previously, bank supervisors had already granted relief to banks. Now, further temporarily relaxed capital requirements are to enable the banks to grant loans even during the crisis.

The Commission’s proposals are intended to prevent accounting provisions for expected credit losses (under the new accounting framework IFRS 9) from reducing banks’ equity in the Corona crisis. We Greens have been fighting this change in accounting rules for years because of their excessively procyclical effects. In addition, temporarily non-performing loans are to be exempted completely from the minimum rules for provisions (“NPL prudential backstop”) if they are covered by a state guarantee. This will initially make possible losses “invisible”. The application of the new rules on the leverage ratio is to be postponed by one year, as also agreed in the Basel Committee on Banking Supervision. Central bank reserves should be allowed to be excluded from the leverage ratio in times of crisis.

The European Parliament is currently dealing with the Commission’s proposals in an urgent procedure. With the exception of the Greens and the Left, all parliamentary groups have proposed additional relief measures that go beyond the original plans of the EU Commission. The current compromise proposal by Socialist rapporteur Jonás Fernández also extends the capital relief compared to the Commission proposal. For example, additional book value losses on government bonds should temporarily not affect the banks’ capital. This follows a long lobbying offensive by the banking sector with many different requests for capital relief.

In our amendments, we Greens have argued in favour of partially restricting the relief and linking it to conditions for the banks. In particular, banks should not make any distributions to owners and risk investors until the end of 2021. In addition to dividends and share buybacks, this also applies to interest paid on so-called CoCo bonds (“contingent convertible bonds” or “AT1 instruments”). In the event of a crisis, these instruments are intended to bear losses and therefore come with particularly high interest rates. While currently many European supervisors such as the ECB are already preventing banks from paying out dividends and buying back shares, the owners of CoCo bonds continue to receive their high interest payments despite the crisis situation and have thus so far been exempted from liability. As part of a cross-party compromise, we would have been prepared to accept the temporary relief for the banks if, conversely, investor liability had become mandatory. But Christian Democrats, Liberals and Right-Wing Conservatives (ECR) and Right-Wing Extremists (ID) were not prepared to accept legally binding liability for bank investors.

The position of the European Parliament will first be voted on next Monday in the Committee on Economic and Monetary Affairs (ECON). At the same time, the rapporteur is negotiating with the Council of Member States, which has already signalled its agreement with many of the additional measures requested by the parliamentary majority. The final result of the negotiations is to be voted on at the next plenary session this June, so that the capital relief for banks can come into force as early as the end of June. In parallel, the EU Commission is preparing a whole series of further financial market deregulations.

Sven Giegold, financial and economic policy spokesman for the Greens/EFA in the European Parliament and shadow rapporteur for the “quick fix”, explains:

“The EU Commission’s proposals are characterised by a lack of balance. The far-reaching relief measures are not complemented by any obligations for bank investors. The EU Commission cannot blindly trust that the easing will lead to more lending to the real economy. Experience from the financial crisis shows that this does not work. Deregulation is the wrong way to stabilise the economy. In a looming financial crisis, the state should not make losses disappear but strengthen the banking system with equity capital. Relief also requires obligations for banks.

The real economy can only benefit if banks do not use the relief to compensate their own investors. It is now important that the additional capital headroom is fully available for financing the real economy. For this reason, the generous easing must be accompanied by conditions that prevent the distribution of capital.

The owners and major investors of banks must not be released from their financial responsibility in the crisis. The biggest losses will only show up in the banks’ books over time. For every euro paid out today, the European taxpayer may end up having to pay again.

We will now put our proposal on investor liability to a roll-call vote as a compromise proposal.”

P.S.: You are cordially invited to the international and prominent webinar: “The Virus of Financial Deregulation”, next Wednesday at 6pm. With experts and NGOs we will discuss current attempts to turn back the European financial market regulation in the shadow of the Corona crisis. Register here.




Green alternative compromise on liability:

(a) The following paragraphs 1a to 1e are inserted:

1a. Without prejudice to the powers and procedures set out in Directive 2013/36/EU, competent authorities shall temporarily suspend variable remunerations, discretionary pension benefits, share buy-back operations and distributions or interest payments by all credit institution to shareholders, members or holders of Additional Tier 1 instruments where the prohibition does not constitute an event of default of the institution. The temporary suspension shall lapse the 1 January 2022 unless the Commission determines by means of an implementing act that the serious economic disturbance caused by the COVID-19 crisis requires an additional extension of the temporary suspension by 12 months.

1b. If an institution Common Equity Tier 1 capital is not reduced to a level where the combined buffer requirement is no longer met and if competent authorities expect that the combined buffer requirement will continue to be met until 1 January 2022, it shall not be subject to the suspensions referred to in paragraph 1a.

1c. Before adopting the implementing act referred to in paragraph 1a the Commission shall request an opinion issued by the European Systemic Risk Board. The Commission shall inform the European Parliament and the Council ahead of adopting the implementing act referred to in paragraph

1d. Competent authorities shall require credit institutions subject to the suspension measures referred to in paragraph 1a to present an action plan within three months specifying internal measures and triggers to restore the soundness the of an institution in accordance with the provisions of Article104 of Directive 2013/36/EU. The action plan shall also provide a roadmap and a strategy to restore compliance with supervisory requirements pursuant to Directive 2013/36/EU and to this Regulation and define a deadline for its implementation. Competent authorities shall review and approve such actions plans.

1e. The power to adopt an implementing act referred to in paragraph 1c is conferred on the Commission acting in accordance with the procedure referred to in Article 464(2).

Category: Economy & Finance, European Parliament

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