Conflicting Views in Shaping of New EU Banking Rules

By Myriam Vander Stichele, SOMO

Vigorous discussions and negotiations have been going on since the beginning of the year about the 4th Capital Requirements Directive (CRD 4) and the new Capital Requirement Regulation (CRR), which will become the EU legislation to implement Basel III as explained in the previous Newsletter. At the level of the Council of Finance Ministers, technical negotiations are taking place among technocrats, sometimes on a weekly basis.  As a result, a variety of amendments are being drafted to allow supervisors to demand higher capital requirements than the general EU level to financial institutions when in particular situations of increased risk (‘package of flexibility’). This contrasts with the European Commission (EC) and the European Parliament (EP) who are in favour of ‘maximum harmonisation’, i.e. having the same capital requirements in all EU member states for different banks.  Also, it was agreed at Council level that no parties other than credit institutions can take deposits, except when sufficient regulation and supervision is present. Other issues under discussion were the zero risk rating for governmental bonds (including from Greece!), risk management, corporate governance and the definition of ‘liquid assets’.

The quick pace of discussions at the Council might weaken the slow position-taking at the EP that extended the deadline to submit amendments to the [draft report by MEP Karas see previous Newsletter) to 5 March 2012. A first discussion about the amendments is happening on 27 March 2012 at the Committee on Economic and Monetary Affairs (ECON). The vote by ECON on the amendments is provisionally scheduled for 25 April 2012 but might change (check the official calendar). After that, the EP and the Council hope to arrive at a compromise in June 2012.

The reform of the Capital Requirements Directive has raised many discussions, articles, debates and lobby activities from different sides with very different views and fundamental criticisms, as referred to in previous Newsletter. The complexity of the whole legislation and its review is itself inherently constituting a systemic risk. Recently, Finance Watch has published a position paper “To end all crises ?” arguing for higher capital requirements and addressing many of the problems, some of which were hardly being discussed, such as more capital against securitisations, the disclosure of risk weight methodologies, and the importance of return on assets.

The EC terminated its advisory committee, the Group of Experts on Banking Issues (GEBI), after criticism from the EP, civil society and the media that GEBI was dominated by representatives of the financial sector. Commissioner Barnier promised in November 2011 to rebalance the expert groups that advise the EC and to grant 1.25 million Euros for building the capacity of consumers, trade unions and non-industry people to be involved in the financial reform process. 

Beyond the ongoing banking reforms, many structural problems still remain in the banking sector. In February 2012, the Commission created the High-level Expert Group on Reforming the Structure of the EU Banking Sector. The mandate of this Expert Group is to propose structural reforms beyond the current proposals such as CRD IV/CRR that regulate individual banks. The Group is expected to focus particularly on:

• Risks to the banking system as a whole, e.g. by separating or restricting certain banking activities;
• Reducing the size of banks and the likelihood of the use of tax payers’ money to save big banks (‘moral hazard’); 
• Promoting competition; 
• Safeguarding the internal market.

The Group is to present its final report to the Commission by the end of summer 2012. 

The Groups members are chosen from different backgrounds, including the banking sector itself, and chaired by Erkki Liikanen who is Governor of the Bank of Finland. The members work in their personal capacity but may organise consultations.

Because of stricter regulation of banks, many activities might increasingly take place in non-transparent ways in jurisdictions that are not regulated. On 19 March 2012, the EC issued a consultation in the form of a Green Paper on how to deal with this ‘shadow banking’ or ‘non-bank credit activity’ as the EC defines it, following the Financial Stability Board (FSB) definition: ‘the system of credit intermediation that involves entities and activities outside the regular banking system’.  A sector that grew strongly before the crisis and is officially estimated at 46 trillion Euro assets in 2010, which is half the total size of the world regular banks’ assets.

The FSB, as requested by the G20 leaders at their November 2010 Seoul Summit, has studied the shadow banking sector and in November 2011 presented its first report. The EC largely follows the analysis of the FSB, stating that shadow banking can be valuable as an alternative source of credit, but does carry risks for financial stability and can be used to circumvent oversight and regulation. For this reason the EC discusses in its Green Paper the possibilities to regulate the shadow banking sector directly, or indirectly through the regulation of regular banking and insurance with relations and exposure to shadow banking. The Commission has invited stakeholders to send their comments to the Green Paper before 1 June 2012. In July 2012, the FSB will present its first proposals for measures to be taken, with more expected at the end of 2012.

Note that today, after a year of study by international regulators and others, much still remains unknown. Who is funding the shadow banks? What role do regular banks, insurance companies and pension funds play in this? Finance Watch has pointed out that the definition of both the FSB and EC is too narrow, excluding foreign exchange and equities trading undertaken by shadow entities.

photo above from Flickr by Cesar Pics