The European Parliament’s Committee on Economic and Monetary Affairs today voted on a comprehensive legislative package to reform European banking rules (CRD, CRR, BRRD). The revision is intended to implement the Basel rules agreed at international level, to clarify existing EU laws and to align the requirements more closely with the size and business model of the banks. Trilogue negotiations with the Council of Member States and the EU Commission are scheduled to begin already after the formal announcement in the July plenary session of the European Parliament. An agreement is expected in early 2019 and the new rules would enter into force at the end of 2020.
The reports adopted today contain several Green proposals: For the first time, large banks will report on environmental, social and governance risks, small banks will be freed from excessive bureaucratic requirements, the exchange of information between bank supervisors and anti-money laundering authorities on money laundering risks will become mandatory and supervisory authorities will be empowered to limit loans to shadow banks and tax havens. Additional capital buffers can now be implemented more easily by the authorities and are subject to fewer restrictions.
Because the legislative package does not go far enough in reducing risks in the financial sector, the Greens abstained on the reports as a whole today. The rules on the leverage ratio and the net stable funding ratio (NSFR) contain numerous deviations from the international Basel standard. The new rules on bank resolution (BRRD) fall far short of the strong position in the Council of EU Member States.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
„The European Parliament is weakening the Basel banking rules on important points. Parliament’s position falls short of the compromise reached by the EU Member States on a number of important points. The lax requirements for the subordination of liabilities are a lobbying gift to the major European banks and endanger the urgently needed deepening of the banking union. German Finance Minister Olaf Scholz is absolutely right when he draws a red line here, which unfortunately Parliament has crossed today.
Today’s decision to reduce bureaucracy in the supervision of small banks was long overdue. Many ideas from the rapporteur, Peter Simon, and from us Greens have been incorporated in the text. We Greens would have liked to have gone even further here.
For the first time, a majority of MEPs have come out in favour of writing the issue of sustainable financial investments into a binding legislative text. It is a novelty that large banks should report on environmental, social and governance risks. The European Banking Authority must also examine how these risks must be taken into account in banks‘ risk management. Together, this is a big step for green financial markets.
Some European banks are still too large and complex, but above all they do not hold enough hard capital. Europe urgently needs more far-reaching reforms to tackle the problems of oversized and inter-connected institutions. Unfortunately, there was no majority for a stricter leverage ratio or hard limits for risks from shadow banks.“
Green proposals for a strong risk reduction package in the banking sector:
Green proposals to strengthen proportionality in European banking regulation:
A compromise text adopted today in committee to strengthen proportionality in European banking regulation:
List of the weakening of the Basel rules on banking regulation:
- Structural liquidity ratio (NSFR): Certain repo transactions must be backed with no or less highly liquid assets (0% Required Stable Funding for secured reverse repos, 5% Required Stable Funding for unsecured reverse repos)
- Leverage ratio: automatic exemption of passing-through loans, automatic exemption of certain derivative transactions (initial margins cleared by qualified central counterparties)
- Revision of the rules on market risk (Fundamental Review of the Trading Book): Gradual introduction by 2027 instead of full application from 2022
- Reduction of risk weights for mortgages from 35% to 30% (lower end of Basel range in a particularly risky area)
Green wins (details for specialists):
- Help credit unions to get an exemption based on reasonable criteria
- Include a minimum of Sustainable Finance in the Banking Package
- Mandatory info exchange on money laundering risks among prudential supervisors and AML authorities
- LR 3% plus G-SII surcharge becomes binding, provisions partly tougher than Basel and Council (50% minimum CET1, earlier introduction of G-SII buffer), Green demand for disclosure of exclusions included in the text
- Variable remuneration: extension of deferral from 3 to 5 years
- Reduce administrative burden for smaller banks (Reporting, Disclosure, no deferral and pay-out in own instruments of variable remuneration below EUR 50.000). Entrepreneurs can stay in the supervisory board of regional banks.
- Comprehensive redrafting of the macro-prudential framework (additivity of buffers, increase in caps, regular review of the framework every three years)
- SREP (Pillar 2 capital requirement): Limit exposure to tax havens (via EBA guidelines) and shadow banks (binding by upgrading guidelines to RTS)
- Maintain discretion for competent authorities when setting binding Pillar 2 capital requirements
- Strengthening of MDA (maximum distributable amount) restrictions (no double-counting of instruments and delete special treatment for CoCo bonds)
- Include new Basel rules on Market risk (phase-in period from 60% to 100% instead of flat-out 65% as proposed by COM)
- Make TLAC (including subordination requirement) for G-SIIs binding in the EU (plus protection of retail investors)