Sven Giegold

Wrong answer to the crisis: Easing of capital rules without obligations on banks

With the so-called “CRR quick fix” of the capital adequacy rules, European banks are to be granted far-reaching capital relief in the Corona crisis. After the EU Commission had submitted a proposal at the end of April, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament today adopted its revised version. The revised proposal significantly extends the capital relief for banks planned by the Commission and is now expected to be submitted to the plenary session of the European Parliament on 18 June for a vote.

The 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. 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 excluded from the leverage ratio in times of crisis and book losses on holdings of government debt instruments should temporarily not affect regulatory capital.

In the negotiations, Greens have argued in favour of linking the far-reaching easing of capital requirements to conditions that ensure that the capital relief benefits the real economy and not just the owners and risk investors of the banks. Above all, we have proposed that banks should not make any distributions to owners and risk investors until the end of 2021 and, in particular, should waive interest payments on so-called CoCo bonds (“contingent convertible bonds” or “AT1 instruments”). The fact that such restrictions on capital distributions are essential in the current crisis situation has been repeatedly stressed by experts and institutions in recent weeks. In yesterday’s hearing before the ECON Committee, Christine Lagarde also stressed the importance of restrictions on distributions for financial stability. She said it was particularly important that these are implemented by all market participants in order to avoid the stigma associated with restrictions on a case-by-case basis. This was precisely the aim of the alternative proposal we tabled.

Christian Democrats, Liberals, right-wing conservatives (EKR) and right-wing extremists (ID) blocked from the outset all binding requirements aimed at holding bank owners and risk investors liable. In order to speed up the process, rapporteur Jonás Fernández of the Progressive Alliance of Socialists and Democrats (S&D), in parallel with the committee’s discussions, already coordinated with the Council, which also rejects conditionality and supports further easing. The report presented by Fernández and adopted today with votes from S&D is therefore a mere gift package to the banks. The alternative proposal tabled by Greens for a legally binding restriction on payouts was supported by the Left and by some S&D members, who thus opposed to the line taken by their rapporteur, but did not receive a majority.

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

“The virus of deregulation is also spreading in the European Parliament. The planned change in the capital adequacy rules for banks is far too one-sided. Instead of demanding binding conditions that make bank owners and risk investors liable in the crisis, the European Parliament’s proposal extends the relief for banks even further. The Council also supports this unbalanced approach. There is no guarantee whatsoever that banks will use the additional flexibility for the urgently needed financing of the real economy.

Until the vote in plenary next week, we will continue to work to ensure that bank owners and risk investors meet their responsibilities in the current crisis situation. The biggest losses will only reach the banks’ books over time. For every euro paid out today, the European taxpayer may end up paying for it again.

The first wave of the pandemic is being followed by a wave of deregulation in Europe in many areas. A number of rules that are now to be abolished have been opposed by lobby groups for years. However, the relief provided will only make a positive contribution to post-crisis recovery if it is combined with smart and binding obligations. The proposals adopted today do not live up to this standard.”

P.S.: You are cordially invited to the international webinar “The Virus of Financial Deregulation”, which will take place tomorrow, 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.

Category: Economy & Finance

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