Negotiators from the European Parliament and the Swedish Presidency of the Council of the European Union will attempt, on Monday 26 June, to reach a political agreement on the legislative package aimed at finalising the integration into the EU of the so-called 'Basel III' banking prudential standards. (see EUROPE 13169/18).
Three political issues remain to be decided: - the level of application of the output floor for banks using an internal model to calculate capital requirements; - assessing the fit-and-proper of a person being considered for a senior position in a large systemic bank; - the supervision of branches of third country banking groups operating in the EU.
In the opinion of several people involved in these negotiations and contacted by EUROPE, the obstacles to be overcome do not seem insurmountable and a positive outcome to the inter-institutional negotiations is hoped for next week. A political agreement had already been hoped for at the previous trilogue on Thursday 15 June in Strasbourg.
Crypto-assets. Settled in earlier discussions, the issue of the prudential treatment of bank investments in crypto-assets will not be discussed on Monday. It is nevertheless an innovative element of the future legislative text.
This issue was presented by the European Parliament, which asked the Commission to make a specific proposal to incorporate into EU law the Basel Committee standard issued at the end of 2022 (see EUROPE 13106/19). The Commission considered that the deadline was too short for a proposal to be included in the trilogue discussions, while the EU Council did not include any provisions on this issue in its political agreement in principle (see EUROPE 13059/1).
During the trilogues, the negotiators reached agreement on the provisional prudential treatment, until at least 2025, of investments in crypto-assets based on the three categories identified in the ‘MiCA’ regulation, namely crypto-assets referring to underlying assets, electronic money tokens and crypto-assets such as Bitcoin.
Prudential requirements for each category will depend on their level of risk. For example, for each euro invested in a Bitcoin, a bank will have to hold one euro of equity capital (i.e. a risk weight of 1,250%). For electronic money tokens, the weight will be set at 250%.
During the transitional period, the Commission will be asked to present a legislative proposal designed to incorporate the Basel Committee’s more detailed and complex prudential standard in the EU.
Output floor. On the output floor that will apply to certain banks, the positions of the EU Council and Parliament have not changed from their initial negotiating mandate.
During the last trilogue, the rapporteur, Jónas Fernández (S&D, Spanish), indicated that the European Commission’s initial position could constitute a compromise. The Commission had recommended applying the output floor at consolidated level with a mechanism for proportional redistribution of capital requirements at subsidiary level (see EUROPE 13059/1).
According to our information, it will be very difficult to change the EU Council’s position on this financial stability issue, which touches on the home/host countries of major banking groups. For the Member States, the output floor must be set at the level of each financial institution, although a country retains the option of applying a minimum capital threshold at the consolidated level of the entities of the same group established on its territory.
On the other hand, the European Parliament advocates applying a threshold at a consolidated level, considering the banking market to be fully integrated at European level. In its view, it is essential that the transitional provisions introduced to limit capital requirements and take account of the specific characteristics of the European banking sector - for example in the case of exposure to unrated companies, low-risk mortgage loans and financial derivatives - are subject to deadlines.
MEPs should also ensure that future regulations include reporting obligations on the exposure of European banks to shadow banking, where less-regulated financial entities perform certain banking functions.
Fit-and-proper. Supported by the Commission, Parliament remains committed to the introduction of an ex ante assessment of the skills and good repute of future managers of a banking group. In favour of the status quo, the EU Council argues that Member States have different traditions in this area.
In Germany, for example, mayors can become members of the boards of regional banks after they have been elected, and introducing an ex ante assessment would be tantamount to granting a right of veto to the competent authority.
“There are plenty of options on the table”, notes one negotiator, who believes that a solution could be found by introducing an ex ante notification to the supervisory authority of the appointment of a future bank manager, with the possibility for this authority to oppose an appointment if it identifies a major risk.
Third country branches. MEPs had saved the provisions on the supervision of branches of third country banking groups operating in the EU, whereas the EU Council had weakened them. On this point, positions no longer seem very far apart.
According to this source, the co-legislators agree to introduce an obligation for a third country bank to set up a branch in the EU above a certain threshold of assets under management, while making certain exemptions, notably in the case of purely interbank relationships. The Member States still want to extend this exemption to any financial entity.
It would also be possible to require a large bank from a third country to transform its branch into a subsidiary if systemic risk is detected. The question that remains to be resolved is the competence to carry out this assessment, which the EU Council wants to maintain at national level without the intervention of the European Banking Authority (EBA).
ESG. Finally, another element of the legislative package concerns the inclusion of Environmental Social and Governance (ESG) risks in the supervision of European banks.
The legislative package will not introduce specific capital requirements for bank exposure to fossil fuel industries, but greater transparency on this exposure will be required.
And the EBA will be responsible for making recommendations on this issue or on the possibility of reducing capital requirements for exposure to environmentally virtuous companies. One of the issues at stake in the discussions concerns the deadline by which the European authority must deliver its recommendations so that the Commission is in a position to make a specific proposal that can be adopted during the 2024-2029 legislative period.
By the end of 2023, the EBA will also have to make recommendations on the availability of data for assessing ESG risks.
Other provisions will concern the valuation of collateral used to guarantee a bank’s exposure, and this valuation must take account of the risk associated with climate change. (Original version in French by Mathieu Bion with Anne Damiani)