Brussels, 15/05/2012 (Agence Europe) - MEPs on the European Parliament's economic and monetary affairs committee have unanimously backed the draft report by Othmar Karas (EPP, Austria) on the transposition into EU rules of the Basel Committee Agreement on bank capital requirements for Europe's 8,000 plus banks. Such unanimous backing is rarely granted to draft legislation and has been welcomed across the board by European political parties for putting the EP in a strong position for the talks with the Council of Ministers next week. On Tuesday, the member states reached broad agreement on new financial legislation (see EUROPE 10615) with the hope of getting it signed and sealed before the summer break (failing which, the EP would vote on the draft rules at its July plenary).
On Tuesday, the day after the committee vote, Karas said the vote sent an unequivocal message from the EP to the Council of Ministers that all political parties are determined to press ahead with bank stability measures and the financing of growth. He said there were three main areas of reform -giving banks a stronger financial foundation, encouraging lending to the real economy and introducing healthy competition in the banking industry. He said the main stumbling blocks in the talks with the ministers would be the degree of flexibility to be granted to member states on the capital requirement question, the scale of buffers to hedge against the risk of meltdown, bank bonuses and co-decision for delegated legislation.
Welcoming the rapporteur's “exemplary behaviour”, Philippe Lamberts (Greens/EFA, Belgium) said changes were urgently needed, as shown by Dexia going bankrupt a second time, the new changes to Spain's banks (suffering from over-ambitious mortgage lending) and the recent US$2 billion losses announced by JP Morgan. Vicky Ford (ECR, UK) said the idea was quite simple - ensuring that banks have enough capital to cover losses and enough cash to ensure customers can get their money when they retire.
Higher quality capital - and more of it. The MEPs believe European banks should increase their capital to 8% (4.5% of top quality capital, a further 1.5% of Tier 1capital and 2% of Tier 2 capital). Banks will be required to set up two further cash buffers, a preservation buffer of 2.5% of top-quality capital and a contra-cyclical buffer. In addition, the two dozen too-big-to-fail European banks would have to hold up to 10% of top quality capital, something the ministers had not been planning. Lamberts said that unlike the European Commission, the European Parliament has called for the introduction of a leverage ratio to prevent banks taking excess risks.
There is hot debate among ministers about the degree of flexibility to be granted to member states that want to introduce tougher capital rules, and the controversy will surface in the talks between the ministers and MEPs. The EP does not want member states to have much latitude for introducing tougher requirements in their country. Karas said that flexibility was needed, but only as part of an EU-wide system. Countries wanting additional rules will have to have them approved at EU level, he said. Karas wants a genuine single market rather than special arrangements for some countries. Ford said that if London or Edinburgh want tougher controls than Paris or Frankfurt, and if that is what their investors want, then they should be allowed to go ahead.
It is no good having more capital if it cannot be accessed quickly when needed. The economic and monetary affairs committee calls for the introduction of two liquidity ratios - a short-term and a longer-term one, which would be introduced by means of delegated acts.
MEPs have introduced draft rules on banks' exposure to parallel banking (see EUROPE 10605), whereby banks will have to provide information on their ten areas of greatest exposure to unregulated financial bodies and must ensure that shadow banking makes up no more than 25% of their total exposure. Sharon Bowles (ALDE, UK) said it was important to know who owns what, hence the requirement to publish information on retiring securities (selling and then buying back in a “repo transaction”).
Growth. In response to many calls for European growth stimulus measures, the MEPs have introduced measures to make it easier for banks to lend on the real economy. MEPs say small to medium-sized European companies should not be seen as riskier than investing in Greek bonds and the Commission is asked to introduce draft legislation by 2014 on the calculation of sovereign debt risk. The weighted risk for small business lending should be cut from 75% to 50% and should only cover loans of at least €2 million, double the current threshold. The weighted risk for infrastructure loans should also be halved. There are special measures for business start-ups and export credits, which have already been welcomed by European small business umbrella group UEAPME and the European chambers of commerce umbrella group, Eurochambres.
Fair play. The economic and monetary affairs committee wants to ensure that European banks are not made less competitive against their global rivals by application of the Basel III rules. Karas said he wanted to ensure that banks on the European continent, which focus on retail banking and are organised differently, do not suffer compared with Anglo-American banks.
The MEPs have introduced rules to cut down on excessive risk, arguing that the current bank bonus rules are not being properly applied. In theory, under the new rules, bank bonuses should never be higher than fixed salary, but they are often up to 25 times higher, explained Lamberts. Bowles said it was clear that the extremely high bank pay levels cannot be allowed to continue, as shown by the recent shareholder revolts. The idea once mooted of restricting the gap between the highest and lowest paid at banks has not been taken up. The agreement in principle reached by European ministers does not cover pay and bonuses.
Differentiation. Backed by fellow German from the GUE/NGL Group, Jürgen Klute, Udo Bullmann (S&D) said that greater efforts were required to differentiate between local banks and the too-big-to-fails and between investment and high street banks and between regulated and unregulated banking. Lamberts said that different rules should apply depending on the size of banks and the type of financial services provided. The MEPs are awaiting the report by the Liikanen working group on the structure of European banking (see EUROPE 10560) and the draft rules on bank crisis management (expected next month). MEPs want to force banks to draw up living wills giving details of how they would manage crisis and bankruptcy (see EUROPE 10586). (MB/transl.fl)