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A proposed review of EU banking rules aims at ensuring that EU banks become more resilient to potential future economic shocks, while contributing to Europe's recovery from the COVID-19 pandemic and the transition to climate neutrality. The public hearing will provide the views of institutional and civil society stakeholders, and will help form the policy recommendations the EESC is drawing up on the legislative proposals currently under discussion.
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Event reportSummary of the debate ECO section president Stefano Palmieri welcomed participants and announced that findings of the hearing would help shape EESC policy recommendations. He reiterated some of the principal policy positions that the EESC had adhered to: a stable financial system that fostered sustainable economic growth; the concept of banks playing their role as intermediaries between saving and investment, and financing the real economy; support for the build-up of capital buffers to make the banks more resilient to shocks, and to help avoid another banking crisis; the cost of a potential future banking crisis not being borne by taxpayers; the importance of maintaining the diversified banking ecosystem that was prevalent in the European Union (a large number of small and regional banks with very close ties to their customers); and the proportionality principle for the banking sector in EU regulations. Regarding the transition to a sustainable and more resilient economy, sustainability factors needed to be considered in financial sector risk management and capital provision. Finally, there was a need to also pay heed to social sustainability risks, which had been jeopardising social cohesion as a result of widening distribution gaps. He also stated that the EESC highly valued an effective EU-wide supervision. Mr Martin Merlin, director at DG FISMA [slideshow available on the event website], explained that the 2008/09 global financial crisis had revealed a number of weaknesses and vulnerabilities in the banking system and therefore, between December 2010 and December 2017, the Basel Committee on Banking Supervision (BCBS) had agreed to substantial reforms of the prudential framework for banks to enhance their resilience, increase financial stability, and provide the basis for stable funding of the economy (“the Basel III framework”). The EU had already adopted banking legislation (CRR / CRR II and CRD IV / CRD V) in order to implement most of these reforms. However, a number of the final elements of the Basel III framework still needed to be implemented. The objectives of the outstanding Basel III reforms were to improve the framework's overall balance between simplicity, comparability and risk sensitivity (e.g. denominator of capital ratios), and to restore confidence in risk-based capital requirements and improve the solidity of banks, in particular by addressing deficiencies of internal models mainly used by large banks. EU implementation is particularly important, given EU banks’ high reliance on internal models and the need to support international regulatory cooperation and multilateralism. Further (non-Basel) CRR3/CRD6 objectives had been to incorporate sustainability risks in the prudential framework (risk management, supervision, stress testing, reporting and disclosure); to harmonise the supervisory toolkit and its application (supervisory approval of certain structural changes, common list of sanctionable breaches, convergent and risk-based fit and proper assessments); to implement lessons learnt from the Wirecard case (prudential consolidation of fintechs, minimum requirements for supervisory independence); to establish minimum standards for third country branches (authorisation and prudential requirements, supervisory cooperation and powers on systemic branches); and to reduce banks’ administrative costs while improving access to banks’ disclosures (dual use of supervisory data, centralised data hub at EBA). Mr Merlin concluded by explaining the trade-offs for Basel III implementation, and the non-significant increase in capital requirements for the EU banking sector. Mr Pablo Hernández de Cos, Governor of the Bank of Spain [speech available on the event website], presented the Basel Committee as the primary global standard setter for the prudential regulation of banks, and a forum for cooperation on banking supervisory matters. Its mandate was to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing global financial stability – a global public good. Given the global nature of the financial system, distress in one jurisdiction or region could easily spill over to other parts of the globe. An open global financial system would therefore require a set of global minimum and consistent prudential standards. Failure to achieve this could result in regulatory fragmentation, regulatory arbitrage, an uneven playing field for internationally active banks, and increased risks to global financial stability. The Basel III framework had been finalised in 2017 and endorsed by the G20 Leaders. The rationale of these reforms remained as important as they had been when they were finalised in 2017. The Basel III reforms had played a central role in ensuring the banking system remained operationally and financially resilient during the COVID-19 pandemic. While the initial set of Basel III reforms had fixed a number of fault lines in the pre-financial crisis regulatory framework, the way in which banks calculated risk-weighted assets (RWA) remained largely unchanged, with an excessive degree of variability in the banks’ modelled capital requirement. The outstanding Basel III reforms had sought to help restore credibility in the calculation of banks’ RWA. Regarding the assertion that the Basel III reforms had not been adequately designed to reflect jurisdiction- or region-specific characteristics, and that their implementation would impede economic growth and banks’ ability to tackle structural trends and challenges, the governor said that the Basel III reforms had benefited from an extensive consultation process with a wide range of stakeholders, and that the finalised standards took on board many of the comments received from stakeholders and reflected the differences in views among members. They included a range of national discretions to provide a degree of flexibility. The Basel III reforms had also been guided by rigorous quantitative analyses that had clearly shown that the Committee had met the objective set by the Group of Governors and Heads of Supervision, to not significantly increase overall capital requirements at global level. Of course, some outlier banks may face higher requirements, for example as a result of aggressive modelling practices. This was an intended outcome of the standards, which had been precisely targeted to reduce excessive RWA variability. It was also increasingly clear that the outstanding Basel III reforms would complement the previous reforms in having a positive net impact on the economy, and would help permanently strengthen the resilience of the economy against adverse shocks. Consistently implementing Basel III in full was deemed a powerful symbol of the jurisdictions’ ongoing commitment to multilateralism. Preserving financial stability would require timely implementation of the reforms in Europe, and the European Commission proposal had already provided for a two-year delay on the globally agreed timeline. Any further delays could result in the European banking system being insufficiently prepared to face future shocks, and could even have undesirable knock-on effects on the implementation process in other jurisdictions. Pursuing approaches that went beyond the flexibility embedded in Basel III should be minimised. There had already been some deviations from the initial Basel III standards in EU legislation, and the European Commission’s proposal included additional deviations. It would be in our collective and global interest to move on towards implementing Basel III and to ensure that attention and resources were focused towards some of the emerging risks and structural trends affecting the banking system, including the ongoing digitalisation of finance and climate-related financial risks. Mr Jonás Fernandez, Member of the European Parliament, announced that as rapporteur he was in the preparation phase of the EP draft report that would be made public around mid-May 2022. Previous reforms had been well oriented, and thus during the COVID-19 crisis, the banking sector had been part of the solution. Following the Basel III recommendations, it had been clear that further reforms needed to be introduced in the EU. Risk isnot a constant, but a variable, and pro-cyclical. With internal models, banks were able to incommensurately recalibrate capital requirements. Mr Fernández therefore agreed with the Basel recommendations and the Commission proposal to apply an output floor. Taxpayers could not be held to cover losses of another crisis. One problem in the banking union was that a European Deposit insurance scheme had still not been put in place. Regarding disclosure elements in the Commission proposals, Mr Fernández stated that more should be done on this matter. Prudential regulation needed to have a clear relation to risk, but in the context of the green deal and climate change, climate risks needed to be integrated. He announced that in the field of crypto assets, the Basel Committee would unveil a proposal this year. Mr Guillaume Primot, French permanent representation to the EU, French Presidency of the Council, gave an outline of the ongoing debate on the legislative banking reform proposals in the Council, and called for a balance to be found between faithfully implementing the Basel rules while also taking due account of EU specificities. The Members States would consider the Commission proposal a good basis for discussion. International competition would be an important aspect to consider, as well as questions related to striking a balance between home and host Member States. A debate in ECOFIN would take place in May or June 2022. The proposals were relatively technical in nature, but also political, as they contained important aspects for financing the European economy. The French presidency had been very committed to multilateralism, and Europe had to avoid being late in adopting the Basel III rules. Third country branches were also an important aspect to consider. With regard to the output floor, work on banks' internal models had been ongoing since 2017. Ms Isabelle Vaillant, European Banking Authority, reiterated that the supervisory community held the position that the reforms needed to be implemented as soon as possible, and as faithfully as possible, for credibility and for better financial stability. She deemed the current practice of relying on metrics to measure risk to be somewhat flawed. EU banks were well prepared for the reforms. The EBA did not fear significant failure as a consequence of implementing the reforms, as the capital increases were not particularly problematic. Additionally, there were distributional effects to be considered. Certain outliers (large banks with internal models) would feel huge impacts, but it wouldn't be the norm, and certainly wouldn't include small banks. Ms Vaillant reminded those present that some deviations from the Basel rules were possible, and that the EBA was ready to work with the legislators on possible forms of discretions. For supervisors, continuing to work on governance was a crucial aspect. In the field of ESG (ecological, social and governance) risks, banks needed to be prepared to measure these risks. She highlighted that the focus was mainly on environmental factors for the moment, however future focus should also include social aspects. Ms Vaillant raised a crucial question regarding the deepening of the market, and how to provide cross-border banking services. Foreign banks had been trying to understand the EU mindset. In the ensuing Q&A round, Mr Kremer, Mr Dandea, Mr Sipko, Mr Kupsys and Mr Guerini raised the following topics: an impact assessment accompanying the proposals, crypto currencies and the Basel Committee's work in this respect; financial stability; the non-financial sector; high levels of household debt at the same time as a rising housing market bubble; climate risks; and small/cooperative banks that operated in groups, and how to calculate risk for them. Mr Merlin stated that the goal was that key banking roles, such as deposit taking and lending, should be carried out by banks more or less established in the EU. In the field of crypto, there were ongoing negotiations on the Markets in Crypto Assets (MICA) legislative proposal, which would seek to regulate all providers of crypto assets. No undue risks should stem from this emerging segment. The regulatory framework should remain risk-based. The EU already had a supporting factor for infrastructure and SMEs, and Mr Merlin considered this to be enough for the moment. The scope of legislative proposals on the table were for credit institutions, shadow not being banking covered. Mr Hernandez de Cos stated in reply that the crypto market was growing very fast, and would pose financial risks if not properly regulated. Banking exposures in crypto were small, but growing. The main deviations in the EU from the Basel standard was the SME supporting factor, and the credit evaluation adjustment (CEA). EU citizens had more to gain from a faithful alignment with international standards. Mr Fernandez repeated that in Europe there were different banking models, and that we therefore needed to carefully analyse regulation impacts. Regarding crypto, the Basel committee would come up with a proposal in 2022. A solution aimed at protecting the banking system from risks stemming from these assets would be needed. Climate risks would need to be included in risk management, but prudential regulation basically would need to rely on risk, and should therefore not be used as a policy tool. Mr Primot referred to the shadow banking sector and explained that the EU approach was to regulate interaction between banks and non-banks. The Council's intention was to finalise the MiCA proposal as soon as possible. Mr Primot said that the EU did not have the intention of re-opening discussions on the already existing deviations from the Basel framework (SME supporting factor, sovereign risk weighting, etc.). Ms Vaillant referred to lending institutions and shadow banking. The EBA was going to issue a technical standard that would require banks to disclose their 10 largest exposures to the shadow sector. The diversity of banking models had always been considered an asset in the EU, and should be preserved. Additional deviations from the Basel rules would be asymmetrical from a cost/benefit perspective. ECO president Mr Palmieri closed the panel by reiterating that financial stability was a global good. Mr Willem Pieter De Groen [slideshow available on the hearing webpage] recounted that the first phase of Basel rules focused on the quality and quantity of capital and liquidity (nominator), and that the second phase agreed in December 2017 focused on the calculation of risk-weighted assets (denominator). The EU was committed to implementing the second phase gradually between 2023 and 2028 (incl. a one-year COVID-19 extension). CEPS had conducted a profound study on the likely impacts of the finalised Basel III reforms (second phase) on EU banks and the real economy. The average increase to cumulative measures would be around 2.3% of risk-weighted assets, which was higher than most buffers. The output floor accounted with around one third of the total cumulative impact for the lion's share of the impact of Basel III measures. The impact differed largely across countries, sizes and business models, and less across ownership types. Globally, systemically important institutions (G-SIIs) experienced larger impacts, primarily due to large impact operational risk adjustments and the introduction of the output floor. Nearly all of the banking sector (90%) could absorb the shortfalls on regulatory requirements by retaining profits up to three years. Mr Gonzalo Gasós, European Banking Federation [slideshow available on the hearing webpage] spoke in favour of compliance with Basel rules, but claimed that the framework was too rigid, and that it needed to be more flexible. He highlighted the need to pursue market integration, and inject some certainty into the framework. Without Basel, banking would have been in a worse state during the COVID-19 crisis. Europe was the jurisdiction that had invested the most in implementing Basel. Mr Gasos pointed to the importance of buffers and European specificities. The biggest EU specificity regarded mortgage loans due to the specificities of the EU mortgage system. These represented about one third of the loans in Europe. The proportionality of rules was important. On climate change, he assessed it not as a risk in itself, but hinted that ESG factors could impact other risks. There was a need for incentives, but capital add-ons were not the right tool. Ms Anna-Maria Romano, UNI Europa Finance, spoke in favour of a proportionality of rule, to better reflect the specificities of the EU banking system. Small- and medium-sized banks were important due to their good relationship with SMEs and households. Macroeconomic risks were building up considerably, as well as the ESG impact. The reforms were important steps to include these risks, including through disclosure. However, the measures set out in the proposals were too weak to tackle green washing. The pandemic had exacerbated existing inequalities, which was also a risk. Finance would need to support, in a sustainable way, the financial inclusion of citizens. Furthermore, supervisors would need adequate staffing to cope with these new rules, as they would imply more responsibility and work. Investment in human resources would be crucial, also in the banking sector. She reminded those present that the banking sector and its workers had been defined as an essential sector and as essential workers respectively during the crisis. Mr Gerhard Huemer, SME United, recalled that in no region in the world was business so dependent on bank finance when it came to investment and economic growth. SME finance had often been carried out through smaller banks, making the conservation of these sorts of institutions very important. He claimed that the Basel agreement was not tailored for smaller banks, and it was therefore the EU's choice to apply proportionality rules. A stable banking sector would be needed, while avoiding credit crunches. Many SMEs were heavily indebted, and they now needed to recover. Increasing the risk weights for equity investments would therefore be important. The output floor played a role for SMEs. Many leasing companies for machines cars were also using an internal approach, because the standard approach was not realistic. If rules became too restrictive, smaller banks would not be able to hand out loans. Mr Huemer spoke out in favour of a two-year delay for the application of the rules, and also on working on internal model improvements. The output floor was considered a step back compared to the risk-based approach. In the ensuing Q&A round, Mr García del Riego stated that financial stability was a global public good, and therefore needed global rules, and asked in which way these should be designed. The panelists concluded that if banks held more capital, it would, in principle, make them more resilient. Banks could absorb the impact of the new rules with future profits. However, implementation in Europe would require a lot of efforts. The implementation of the Basel agreement had been more complex than in other jurisdictions. The banking package proposed by the Commission had been quite far reaching. The EU could consider singling out certain parts of the banking package that were not impacted by the deadline for the Basel implementation. A pathway would be needed that could lead to balancing, and the EU would need to cooperate internationally. The EESC rapporteur for the opinion on the Banking Package, Mr Bogdan Preda, underlined the complexity of the dossiers and the merits of the hearing that would help in developing a well-founded EESC policy position. All Basel III standards were to be applied by internationally active banks, however the Commission's package had gone beyond Basel III, as it did not solely refer to internationally active banks. Regarding the part related to the ESG, it would be wise to remember that Europe was on the forefront of such a regulating package to make Basel III even more powerful. A sound regulation of the financial sector would be crucial, and sound capital provisions would be important in avoiding using public money for bailing out banks. However, excessively large capital requirements had had a detrimental effect. End of the public hearing.
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