Sven Giegold
Member of the European Parliament – Greens/EFA Group

Speaker of the German Green Delegation

New banking rules strengthen financial stability in Europe

Today, 27 October 2021, the EU Commission presented its proposals for the revision of the European banking rules CRR/CRD. They determine above all how much equity and liquidity credit institutions must hold. The main aim of today’s proposal is to transpose the last outstanding elements of Basel III into European law. Basel III refers to the fundamental reform of international banking rules that the Basel Committee on Banking Supervision decided on in response to the great financial crisis. Actually, the Commission proposal was already planned for summer 2020, but was then repeatedly postponed due to the Covid-19 pandemic and controversies between the member states. France in particular campaigned aggressively for a weakening of the so-called output floor, which is to limit the capital benefits from using internal models. We Greens had strictly rejected such a deviation from the international Basel III consensus, as did the ECB, thenEBA and many national financial supervisory authorities and central banks.

The proposal presented today by the EU Commission now provides for the introduction of the output floor without any significant weakening. Instead of the parallel-stack approach favoured by France, the Commission is opting for a single-stack approach as provided for in the Basel standards. However, the output floor is to be introduced only gradually until 2030 – and thus two years later than envisaged by the Basel Committee.

In addition to the controversial output floor, the EU Commission proposes a large number of other changes to the banking rules. Further elements of the Basel III compromise will be implemented, including the new credit risk standardised approach. The powers of the supervisory authorities are extended, especially in the case of branches of foreign banks. However, the EU Commission refrains from proposing more extensive supervisory powers with regard to the distribution of dividends. In the future, sustainability risks are to play a central role both in the internal risk management of the institutions and in the supervisory review process SREP.

While the introduction of the output floor will increase the capital requirements of large banks in the medium term, small and medium-sized institutions will hardly be affected. However, the EU Commission’s proposal also contains almost no new measures to further relieve small and medium-sized banks of unnecessary bureaucracy. During the last revision of the banking rules, the EBA was given the task of proposing possible relief measures. These are now being implemented by the supervisory authorities, but do not provide comprehensive relief. We Greens had always advocated much more far-reaching simplifications for well-capitalised small and medium-sized banks.

MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:

“The new banking rules strengthen financial stability in Europe. Europe’s financial markets will become a bit more crisis-proof. It is important that the EU Commission does not soften the requirements for banks. Today, the EU Commission is clearly rejecting the demands of Emmanuel Macron for a watered-down Basel III implementation. Limiting the capital benefits from the use of internal models is a centrepiece of the financial market reforms after the financial crisis. A watering down would have severely damaged Europe’s credibility vis-à-vis international partners and would have called the entire Basel process into question.

However, it is also clear that the EU Commission has made concessions in order to dampen the projected overall increase in capital requirements. In doing so, the EU Commission has accommodated individual member states. In view of unweighted capital ratios of only about five percent, Europe’s major banks can hardly be deemed well-capitalised. We Greens will carefully examine all new special rules to see whether they are justified from a risk perspective. Pure lobbying gifts and economic policy have no place in banking regulation.

When it comes to sustainability risks, the EU Commission falls short of the ambitions of the European Green Deal. It is welcome that the role of sustainability risks in internal risk management and in the supervisory process is being strengthened. However, there is no clear and binding timetable for the overdue integration of sustainability risks into the hard capital requirements of Pillar 1. Instead of waiting another two years for an EBA report, the EU Commission should present a new legislative proposal as soon as possible. In the meantime, I appeal to all European financial supervisors to pursue the issue of sustainability risks with vigour. Financial supervisory authorities should use their leeway and impose capital surcharges for sustainability risks. As long as the EU Commission does not get its act together, this option must be used consistently.

Despite the output floor, European banking rules remain tailored to big banks. For small and medium-sized banks, the requirements and the bureaucratic burden remain disproportionate. Instead of developing the Small Banking Box of the last revision further, the EU Commission is completely ignoring the issue of proportionality this time. We Greens in the European Parliament will again propose to drastically reduce the supervisory and disclosure requirements for well-capitalised small and medium-sized banks.”

Background: Output Floor

The output floor is a core element of Basel III. The financial crisis revealed that many banks had drastically underestimated risks in their mathematical models. The output floor is intended to ensure that banks that use internal models to determine their capital requirements can no longer underestimate their risks indefinitely. In the future, the maximum benefit from using internal models compared to the simpler standardised approaches is to be limited to 27.5%. Since most small and medium-sized banks exclusively use the standardised approaches, the introduction of the output floor is irrelevant for them. For the big banks, on the other hand, which have so far benefited from the unlimited privileging of the internal models, the capital requirements may increase noticeably.

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Proposal by the EU Commission for a revision of CRR, CRD and BRRD from 27 October 2021:

https://ec.europa.eu/commission/presscorner/detail/en/ip_21_5401