The Chair of the ECB’s Supervisory Board of the Single Supervisory Mechanism (SSM), Andrea Enria, said, on Thursday 14 October, that it was of “paramount importance” that the outstanding standards of the ‘Basel III’ agreement on bank capital requirements are implemented “in full, and in a timely and faithful manner", as the European Commission is expected to present a specific legislative proposal on Wednesday 27 October.
The forthcoming legislative package is “somewhat more impactful” for the EU banking system than elsewhere in the world because “we’ve progressed more in terms of internal models”, Mr Enria acknowledged in a debate with the European Parliament’s Committee on Economic and Monetary Affairs. He advocated for a long period for the gradual introduction of the future rules. But, in his opinion, it is necessary to stick as much as possible to the agreement of the ‘Basel III’ Committee, because this reform had been requested by the Europeans.
The ‘Basel III’ agreement strikes a balance between internal models (banks apply their own formulas under the supervision of the supervisor) and standard models (banks apply a formula defined in a regulatory manner) for calculating risks (see EUROPE 11921/20).
In order to converge these two models, an output floor will gradually be introduced. From 2027 onwards, the result obtained by the internal model may not be less than 72.5% of the calculation obtained via the standard model. According to the international agreement sealed at the end of 2017, this minimum threshold was to rise to 50% in 2022 and 70% in 2026.
For Mr Enria, the 72.5% threshold is a victory for the Europeans in the talks, as the US and emerging economies did not want to hear about it initially.
Danuta Huebner (EPP, Poland) asked him about the advantages and disadvantages of the two options (‘single stack’ and ‘parallel stack’) for applying the floor threshold.
Mr Enria said that he favoured the ‘single stack’ option, which would lead to a sharp increase in capital requirements for low-risk assets. However, as a single banking supervisor, “we are formally committed to avoid that an inflation of risk-weighted assets due to the output floor leads to an automatic increase of our requirements“, he stressed. “We will recalibrate the charge in order to ‘sterilise’ the effect of output floor”, he said.
France, which favours the application of the second option, found itself isolated when a majority of national supervisors wrote to the EU institutions at the beginning of September asking for a full application of the ‘Basel III’ agreement.
In response to a question from Jonás Fernández (S&D, Spain), Mr Enria also recalled that the Basel III agreement takes into account “European specificities”, notably on how to deal with smaller banks and the issue of mortgage credits.
He replied in the negative to a question from Ernest Urtasun (Greens/EFA, Spain) on whether the supervisor should have binding and cross-cutting powers to prohibit the payment of dividends by the banking sector. At the height of the Covid-19 pandemic, we were the most cautious supervisor in this area and we already have the competence to act at the level of an individual bank”, said Mr Enria.
Antonio Rinaldi (Identity and Democracy, Italy) called for lower capital requirements for SME lending, but the SSM Chair said the pandemic had shown that the level of capitalisation of the banking sector was adequate, especially to cope with massive liquidity demands in emergency situations.
“A good capitalisation level is essential to make banks shock absorbers rather than shock amplifiers”, said Mr Enria.
NPLs. As governments gradually withdraw their emergency budgetary support for the pandemic, the Supervisory Board is closely monitoring non-performing loans (NPLs), whose ratio to total loans continued to decrease in 2021.
According to Mr Enria, however, banks are “overly-optimistic” in assuming that this decrease will continue into 2022, as there has been a build-up of residential real estate “vulnerabilities” in some countries.
In a subsequent debate with MEPs, the President of the European Banking Authority, José Manuel Campa, said that the level of NPL lending was going to increase “at least“ in some sectors of the European economy.
Lastly, Mr Enria also brought up the risks posed by banks’ “excessive search for yield” in a very low interest rate environment. This increases leveraged debt and unsatisfactory levels of transparency of financial markets, he said. (Original version in French by Mathieu Bion)