The Ecofin Council’s public debate on the finalisation of the integration of the Basel III agreement on banking prudential requirements into the European Union on Tuesday 9 November highlighted the differences between the home and host countries of banking groups.
Many Member States—Belgium, Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Italy, Latvia, Lithuania, Luxembourg, Poland, Romania, Slovakia—have criticised the European Commission’s approach to establishing an output floor for banks using an internal model to calculate capital requirements according to the nature of the risks incurred (see EUROPE 12821/2).
We regret that the output floor applies “only at the consolidated level” of a banking group, said Belgian Finance Minister Vincent Van Peteghem. He said the provisions on the table set “a dangerous precedent” for Member States hosting banks established in other EU countries.
For these countries, the prudential requirements derived from the ‘Basel III’ Accord should apply to all entities of a group for the purpose of addressing financial risks where they actually exist.
EU Financial Services Commissioner Mairead McGuinness was keen to point out that “the proposal is specific to the context of implementation of Basel III standards and does not set a precedent for any other part of the banking regulation framework”. “The amount of capital is calculated at consolidated level to limit the overall impact of the implementation of Basel III as requested by the Ecofin Council and the EU Parliament”, she added. According to her, “the proposal maintains the balance between home and host Member States”, while understanding that "it will be an issue that will be discussed further”.
For Commission Vice-President Valdis Dombrovskis, the approach chosen is designed to foster the integration of the European banking market. He nevertheless referred to “the need to reassure host countries that capital will be available” at the level of a bank’s subsidiaries in case of a financial emergency.
Only Portugal has explicitly supported the approach of applying the output floor at the consolidated level of a group.
Single stacks. Other countries, such as Denmark, have also criticised the single stack approach to applying the minimum output floor of capital requirements. In its view, this approach will adversely affect banks that provide low-risk mortgages.
Defending the Commission’s proposal, Ms McGuinness argued that the specificities of national banking markets had been taken into account, notably the fact that “banks finance lowest mortgages and keep these mortgages on their balance sheets”. But taking into account the specificities of the European banking sector should not weaken our commitment to international standards, she stressed. She also emphasised, “ We have to be prudentially credible”.
In order to smooth the impact of Basel III, the Commission’s proposal suggests targeted transitional arrangements, notably for low-risk mortgages. Denmark has requested that these measures be made permanent. (Original version in French by Mathieu Bion)