Brussels, 24/04/2012 (Agence Europe) - EU member states' sherpas will be examining the CRD IV draft legislation again on Wednesday 25 April, which transcribes into EU law the Basel Committee changes to bank finance rules. A week ahead of a special ECOFIN Council on 2 May, convened by the Danish Presidency, two issues remain undecided - the option for a country to introduce higher bank capital requirements than set out in EU rules; and the requirement that banks publish their leverage ratios by a given date. Co-legislator for this legislation, the European Parliament has decided to postpone the committee vote on Wednesday on the draft report by Othmar Karas (EPP, Austria). The political parties at the EP are trying to reach agreement in order to reduce the mammoth number of amendments - more than 2,000 have been tabled to date. The parties are also trying to reach agreement on rules to reduce the size of bank bonuses, an issue that the Council of Ministers has not been addressing.
Flexibility vs full harmonisation. Ministers are lining up in two opposing camps over whether countries should have to introduce the same capital requirements across the EU of at least 7% Tier one capital for banks registered in their country. Headed by the United Kingdom, one group of countries, including Sweden, Spain and Bulgaria, want flexibility. There other group, headed by France and Germany, disagree because it wants as much harmonisation of the law as possible, as suggested by the European Commission, in order to have a single rule book.
Cross-border banks agree with the French arguments, with a representative saying that they very much disagree with the capital buffers for protecting against the risk of bankruptcy, preferring maximum harmonisation. Buffers would mean the end of the single market, said the representative, adding that banks understood the fear of countries where banks make up a high proportion of GDP, but these are countries where the bank resolution system should come into play.
The Danish Presidency says that delegations agree that this is the main issue that is preventing agreement being reached. In a compromise document, the Presidency suggests that in the event of the risk of economic meltdown being detected in their country, member states should be allowed to force banks to have 5%, rather than 3%, of extra-high quality capital without requiring the prior authorisation of the European Commission. For up to three years, countries would therefore be allowed to apply stricter capital and publication rules.
Leverage ratios. The Danish Presidency agrees with the European Commission idea that publication of leverage ratios should be made compulsory in 2015. Leverage ratio calculation methods will be set out by the European Commission in a special report to be published at the end of 2016, but Germany and France do not want publication to be made compulsory until it has been decided how leverage ratios are to be worked out.
There is a qualified majority of countries at the Council of Ministers that agree on how core capital is to be calculated, although the UK and Sweden do not agree. Alongside common shares, other shares may also be seen as Tier 1 if they meet 14 criteria, such as not conferring preferential rights. This does not comply with the strict interpretation of the Basel Committee, but does allow the tacit agreements (“Stille Einlagen”) used in Germany to be included as Tier 1.
Savings banks and building societies want special rules to apply to them for the calculation of capital because they say that the Basel Agreement gives special treatment to ordinary shares, which acts to the advantage of banks quoted on the stock exchange, as opposed to traditional building societies whose main source of capital is retention of earnings. Overall, banks tend to go along with the Commission's approach that the substance is more important than the form when it comes to deciding what can be included as top-quality capital.
Small business lending Building societies and savings banks want greater flexibility on the amount of capital required to offset lending to the real economy. The higher risk levels decided upon for loans to small businesses should be reduced, for example, because experience shows that small business lending is less risky than purely financial risks. The European Banking Authority (EBA) will be publishing a report on this.
The draft CRD IV legislation stipulates that by 2015, the minimum bank capital should increase from 2% to 7% of assets, of which 4.5% should be Core 1 - shares and retained earnings - and 2.5% a capital buffer (see EUROPE 10423). The Commission says this would force the 8,000 or so European banks to raise an additional €460 billion by 2019 in order to comply with the higher capital requirements. At the worst of the sovereign debt crisis, the European Council of October 2011 forced the 90 European banks sitting the stress tests to increase their Core Tier 1 capital to 9%. The industry fears that over-strict rules and insufficient lead-in times will make Europe's banks less competitive than their competitors. The United States, for example, has not yet introduced the Basel Committee's capital requirements. (MB/transl.fl)