The European Commission presented, Wednesday, its transposition project of the 2017 International Basel III Agreement, supposed to prevent a new financial crisis. Its implementation is planned only from 2025.
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The European Commission finally managed to appease the spirits, on Wednesday, October 27, its reform of the banking regulation of the European Union (EU). This text transposes into European law the international agreement between December 2017 in the Basel Committee, this forum bringing together the supervisors of twenty-seven countries and who works to strengthen the strength of the global financial system.
This agreement, obtained from high states between States to often divergent interests, has come to finalize the regulatory building gradually constructed in the aftermath of the 2008 financial crisis. The EU becomes the first jurisdiction to launch the transposition of these measures International.
The path was complicated to achieve a text taking into account the European peculiarities, while remaining in the spirit of Basel and multilateralism, in order not to discourage the United States, Japan, the United Kingdom or Brazil to apply this regulation in turn. All under the pressure of banks and some states that, like France, wanted to relax as much as possible the rules to preserve European financial competitiveness in the face of international competition.
Capital floor
The key point of Basel III is in the European “bank package”: the establishment of a “capital floor” (or output floor). What is it about ? Today, two methods oppose to calculate the risks taken by the banks. US banks generally assess the risk of a borrower based on the data of international rating agencies, it is the “standard” model. The European institutions favors “internal” models, by assessing the risks, based, in particular, of historical data.
This second method has the advantage of reducing the volume of capital to put in reserve. To limit this gain, banks using the internal model in the future will not be able to fall below 72.5% of the level of own funds (or capital) required by the standard model. These new rules were to apply gradually from 2023, but the Commission wants to give more time to the institutions to adapt and proposes to delay their two-year application at 2025.
In addition to this calendar flexibility, the institution wants to temporarily adjust some specific risk calculation rules, such as those concerning small business loans or less risky in Europe than in the United States . According to the Commission’s calculations, this finalization of Basel III reform should lead to an increase in the equity requirements of EU banks “of less than 9% on average” by 2030. An online level With the mandate given by the G20 to the Basel Committee not to too significantly increase additional capital requirements, not to penalize the financing of the economy.
If European banks have protested against this regulatory tightening, Joachim Wuermeling, a member of the Executive Board of the German Central Bank, said it could have been worse and that German banks “can be relieved”. “This text is still insufficient, for example on the treatment of market risks or real estate credits, but it is a bargaining basis,” says Nicolas Théry, President of the French Banking Federation and Crédit Mutuel. This proposal of the Commission must now be discussed with the co-legislators, the European Council and the MEPs.