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EU regulators warn Brussels on dilution of global banking rules

Europe’s most powerful banking regulators have rebuked the EU’s efforts to implement rules on banks’ capital levels, warning the reputation and competitiveness of the region’s financial sector will be hit by Brussels’ attempts to dilute the global standards.

The EU has delayed the introduction of the Basel bank capital reforms for two years, giving banks until 2025 to implement standards that were put forward for introduction at the start of 2023. The current proposals also include deviations from the deal inked by global regulators, which are aimed at making the package a better fit for the EU’s banking landscape. Politicians are now pushing for further changes as they thrash out the final shape of the package.

The region’s top banking regulators, from the European Central Bank and the European Banking Authority, warned on Friday that they were “very concerned” that in the course of discussions on the package “numerous calls have been made to deviate from the international standards”.

“At stake here are the reputation, the competitiveness and, ultimately, the funding costs of the EU banking sector,” Andrea Enria, chair of the ECB’s supervisory arm, Luis de Guindos, vice-president at the ECB, and José Manuel Campa, chair of the European Banking Authority, wrote in a blog post published Friday.

The latest deviations include making it less costly for banks to finance land development and construction. They also make it cheaper for lenders to hold subordinated debt — a form of unsecured, riskier borrowing — and easier to spread debts across their network of group companies.

Earlier changes, which the ECB and EBA also warned against, included making it cheaper for banks to lend to small businesses, something that EU policymakers argued was necessary because European companies are more reliant on bank loans than their US counterparts. The proposals, if introduced, would reduce the additional high-quality capital EU banks would need to hold in order to comply with the new rules by 3.2 percentage points from 15 per cent to 11.8 per cent.

The regulators argued that watering down the capital standards could hurt the EU’s banks rather than help them.

“Europe and European banks would suffer not only in terms of reputation but also in terms of resilience,” the regulators wrote, adding that recent shocks such as Covid-19 and Russia’s invasion of Ukraine, along with the “highly uncertain outlook” banks now face, advanced the case for “prudence” in how banks assess risk.

They also hit back at claims that the package was not a good fit for the EU, saying these were “misleading”.

“Europe sat at the negotiating table in Basel, and the final agreement consequently incorporates many suggestions and adjustments put forward by European actors,” the regulators wrote.

The proposed changes would make the Basel package more complex, adding to the costs of implementation, the trio said.

Jonás Fernández, the MEP leading the negotiations for the European parliament. said he shared the regulators’ unease. “I have been concerned from the beginning because the [European] Commission proposal introduced new deviations from Basel and, even worse, some of them could be even permanent, not just transitory,” he said.

He said he was working on implementing Basel “timely and fully”.

The commission parried the claims that the rules had been weakened.

“In 2021, the commission put forward a legislative proposal which faithfully implemented the international Basel III agreement, while taking into account the specific features of the EU’s banking sector,” it said. “We would not comment on ongoing discussions by the co-legislators.”

The possibility of further changes to the EU rules complicates matters for the UK, which has promised to introduce its detailed proposals by the end of the year and is aiming to stay faithful to the Basel text while not leaving its banks at a competitive disadvantage to their EU neighbours in certain areas.

Additional reporting by Javier Espinoza in Brussels

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