Sunday, December 5

Brussels conspires to avoid “financial system disasters”

May the suffering caused by the banking disasters not be repeated. It is the message launched this Wednesday by the Commissioner for Financial Services, Mairead McGuinness, in the presentation of new regulations that come to complete the implementation of the Basel III agreements (2017) on the financial sector. “We have learned a lot from the financial crisis, which caused great disturbances,” acknowledged the economic vice president of the European Commission, Valdis Dombrovskis, “the banks have coped well with the pandemic, but there are still problems because global rules are needed, there can be no isolated actors. The important thing is to complete the reforms, which this time have to do with how banks measure risks. ”

Indeed, the European Commission has presented this Wednesday a regulation on how financial institutions measure risks. “Using international standards means that banks can use fewer internal models for their capital needs. This is the key to Basel III, the so-called output floor. The output floor is a kind of “common calculation” agreed in Basel III in relation to the mattress of dough that each bank has to save in case things get ugly. The idea is that there is a global standard of what banks have to set aside.

Faced with this, French and German banks are reluctant, allude to the fact that they have a complex business and defend their “internal models” to calculate what the real risk of their business is and what they have to have as a “cushion”, as explained this weekend by El Confidencial.

According to the international agreement, the output floor it had to be calculated as risk-weighted assets (which is the total assets of a bank, multiplied by their respective risk factors) or 72.5% of assets weighted according to a list of standard methods. The Commission’s proposal establishes that 72.5% will be progressively reached in 2027.

“It is about reinforcing the resilience of banks to shocks,” said Dombrovskis: “This threshold must be gradually introduced, with the characteristics of European banks, and given more powers to supervisors so that bankers are up to par. In addition, banks must account for environmental, social and governance risks. ”

According to the economic vice-president of the European Commission, the EU depends “on a strong and stable bank that finances the social market economy, in favor of citizens and companies. Banks are key in our economies, that they can continue to lend to families and companies Banks are not part of the problem, but part of the solution. They need to be strong and competitive. ”

“We have said from the beginning that we were going to apply the Basel III agreement faithfully, but with European specificities, being aware that it could not lead to significant increases in capital requirements of more than 10%. The idea was that in the long term Capital requirements will increase by 8% -9%, in the first years it has been 3%. In each jurisdiction there are specificities. The EU is the first jurisdiction with legislative proposals on Basel III. The US has not done it, neither has the UK “.

Indeed, if Basel III were applied to the letter, it would force banks to make an adjustment for 2030 of 18.5%, half of the 9% requested by the European Commission.

Commissioner McGuinness explained that capital requirements are being “increased to integrate governance, environmental and social risk management. We are empowering supervisors so they can adopt rules of attitude and good repute to see if managers they have qualities to manage a bank. We are finishing the work of more than a decade ago. We want a strong, robust, competitive system. ”

“We have learned our lesson”, said the Irish commissioner: “When it comes to regulating supervision, we must learn, but also prevent crises. Today’s package is a reinforcement of the banks to have a strong and robust sector, which prevent the crises of the past. Many people have suffered from disasters in the financial system. ”