Huw Jones

LONDON, (Reuters) – The European Union released draft legislation Wednesday in order to implement “faithfully”, the last batch of stricter global bank capital regulations starting 2025. This is two years after international agreements.

After the first batch of rules was implemented, European banks now hold about three times the capital they had before the global financial crisis of 2007-09. This saw countries bailing out their failing lenders.

Brussels claims that its proposal would increase capital requirements slightly by 9% per year by 2030. However, banks claim the impact will be greater in practice and make it more difficult for them to assist the recovery of COVID-19.

The European Parliament and EU States have the final say in the European Commission’s proposals to transpose the Basel III global banking capital accord. However, there is a chance of haggling or tweaks.

Valdis Dombrovskis, Executive Vice President of the European Commission, stated that they are diligently applying Basel III without forgetting some European specialities and making sure it doesn’t lead to an increase in capital needs.

European Commission’s executive proposes that the EU start rolling out these changes starting in January 2025. Basel Committee of international banking regulators agreed to delay the implementation for 12 months due to COVID-19.

Dombrovskis stated that a second delay is “realistic”, given the amount of time required by banks to recover from COVID-19 and prepare their internal systems. The EU was still in front of the United States and Britain when it comes to publishing proposals.

Bank of England and commercial bankers have called for global alignment in timing.

Michael Lever from AFME, the head of prudential regulations at European banks lobby, said that the Commission has expressed its appreciation for the extension of the date of implementation to January 2025.

Banks worry privately that investors may demand lenders comply sooner than expected, even if there is a delay.

Fixing the Floor

Larger banks are allowed to keep using their own models for determining the capital buffers size. This is an advantage over smaller lenders, which must use conservative calculations that regulators have set.

The new “floor” sets a lower cap on models’ capital, and will gradually be implemented in five-year increments to 2030. Although banks argue that the floor is incompatible with capital buffers set by national regulators (which they reject), Brussels has rejected a workaround for industry, citing safeguards to avoid duplicates.

In five to eight years, the effect of the floor will be phased-in on loan to companies without credit scores and home loans with low risks.

EU guidelines on disclosures by banks of environmental, social, and governance risks (ESG risks) will be embedded in law. However, banks are concerned that regulators may impose capital buffers to protect against such risks.

By introducing common supervision and authorisation, the proposals also bring together a number of existing rules regarding foreign bank branches within the EU. This is a step towards the creation of expensive subsidiary companies, according to some lenders.