As part of the debate on the competitiveness of the European Union’s banking sector, Spain, France and Italy are advocating overcoming the current “structural impasse” that limits the ability of banks to evolve within the banking union due to the lack of prudential rules that protect the interests of the home and host countries of banking groups (known as the ‘home/host issue’).
According to ECB experts, the absence of derogations for cross-border liquidity limits the transferability, within the euro area banking union, of €230 billion of high-quality liquid assets. Furthermore, €225 billion of capital instruments (of which €180 billion is top-quality CET1 capital) are blocked in cross-border subsidiaries, the three Member States have noted in a non-paper, a copy of which has been obtained by Agence Europe.
Madrid, Paris and Rome are advocating the introduction of a specific regime for cross-border groups, which would include banking institutions that meet specific clearly defined criteria (e.g. minimum thresholds for assets and liabilities in at least one country of origin).
This regime would make it possible to “approach a ‘branching’ model” so that a banking group could be considered as a single legal entity operating on a cross-border basis. It would have the following features:
- fully harmonised prudential requirements and rules governing resolution, which take precedence over national regulatory discretions and options.
- compulsory intra-group support, where the head office of the group would be legally obliged to support its subsidiaries in the event of financial difficulties. This would be under the supervision of the competent European and national authorities.
- granting of waivers on capital and liquidity requirements and lifting of ring-fencing measures imposed by host country authorities, such as limits on certain large exposures.
- the introduction of a harmonised hierarchy of creditors at group level, which would facilitate the planning of a bank resolution and reduce friction between home/host countries over the absorption of losses.
- a unified framework for banking crisis management.
EDIS. The three Member States stress the need to complete the banking union by establishing the European Deposit Insurance Scheme (EDIS) in two phases.
This system would initially consist of a liquidity support mechanism between national bank deposit guarantee schemes (DGS), through loan agreements between DGSs. During the second phase, the EDIS system would then be fully integrated, thereby pooling the losses caused by a bank failure.
Contributions to the future European bank deposit guarantee fund would depend on the risks incurred by each financial institution. According to the three countries, the level of current resources should not be increased but instead, rather more integrated at European level.
At the same time, the three countries are emphasising that European solutions will have to be “explored” in order to tackle the problem of liquidity in the event of a bank resolution, with a specific role for the ECB acting as a single supervisor.
Level playing field rules. Spain, France and Italy advocate ensuring a level playing field for European banks vis-à-vis their international competitors.
In particular, they envisage granting the European Commission the power to update prudential rules “in a targeted and temporary manner, through the adoption of delegated acts in predefined areas and circumstances”.
Taking the example of the measures aimed at reducing the prudential framework applicable to the market risk of investment banks (‘FRTB’) (see EUROPE 13881/25), the three countries list several areas in which this approach can be applied: investment banking, specialised lending and infrastructure financing, and banks’ investments in their own IT infrastructures.
In addition, again with a view to preserving an international level playing field, the Spanish, French and Italian authorities consider it necessary to reassess the level of application of the minimum capital threshold (‘output floor’) for banks using an internal model in their calculation of capital requirements. The same applies to the prudential framework for exposures to mortgage credits and loans to unlisted companies.
Simplification. Simplification of the regulatory framework, especially for small, non-systemic entities, is the third aspect of the measures recommended by the three countries, although they refuse to accept any deregulation.
This would simplify the architecture of capital requirements (‘capital stack’), in particular by eliminating the additional measures added at European level (‘EU gold-plating’) as well as regulatory duplication and overlap.
The three countries suggest the creation of a specific committee (‘EU Financial stability and Competitiveness board’), made up of representatives of the competent authorities, which would provide non-binding recommendations to the supervisory authorities on issues relating to capital requirements.
Another proposed simplification concerns the derived regulation (level 2) of the prudential framework and the guidance (level 3) provided by the European supervisory authorities. These clarifications to the prudential framework, especially the guidance provided at level 3, should be based more on qualitative considerations. Furthermore, they must not become a set of parallel rules going beyond what has been decided by the European legislator, warned the three Member States.
They are also in favour of a warrant for the European Banking Authority that reflects the objectives of simplification and competitiveness.
Furthermore, while they do not question the application of Basel Committee standards to all EU banks, the three countries also believe that the prudential framework should better reflect the risks incurred by banks. They put forward the idea of a specific regime for non-complex banking establishments, under which the banks concerned would be subject to lighter rules, not just in the area of reporting.
Finally, Madrid, Paris and Rome are calling for explicit recognition of cooperative credit institutions in the regulatory framework in order to lighten the prudential supervision to which these mutual banks are subject. (Original version in French by Mathieu Bion)