International Relations

Finance Watch: Parliament compromises on bank safety

Brussels, 21 June 2018 – The ECON Committee of the European Parliament on Tuesday adopted a compromise on the Banking Package proposed by the European Commission in November 2016. The Package comprises substantial amendments to the Capital Requirements Regulation and Directive (CRR/CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Regulation governing the Single Resolution Mechanism (SRMR).

Finance Watch’s Senior Research and Advocacy Advisor, Christian M. Stiefmüller, said:
“Billed as the incorporation of the last round of the Basel Committee’s Basel III reforms into EU law the compromise text bears all the hallmarks of two years of relentless lobbying by the banking industry. The compromise, which will now be negotiated in Trilogue, is a minimalistic and reluctant attempt at combining formal compliance with Basel III with a distinct move towards deregulation. Every time a balance had to be struck between financial stability and the commercial interests of the banking sector, financial stability has reliably come out in second place.”

While the compromise makes welcome progress in some areas - notably proportionality for smaller banks, and environmental, social and management issues – the provisions concerning financial stability and moral hazard are disappointing.

The bank recovery and resolution regime, last line of defence against a systemic crisis after the sad demise of the proposed Bank Structural Reform Regulation, has been further weakened by a proposed approach to creditor subordination that blithely ignores fundamental differences between bank customers, suppliers and investors and is bound to render the “bail in” tool practically unworkable in many cases. MREL, the amount of funds that may be used for recapitalising a troubled bank, is being capped and resolution authorities’ discretion severely curtailed. By blunting their most critical instruments policymakers have made the resolution authorities’ near-impossible task that little more impossible still.

At the same time, known problem areas, such as the “precautionary recapitalisation” clause that has now been used repeatedly to justify the use of taxpayers’ money to prop up ailing banks – which has been overdue for review for two and a half years now – have not been addressed.

New rules on capital, in particular the leverage ratio as one of the few genuinely new concepts that were introduced as a result of the abject failure of the Basel II capital adequacy framework, are now being implemented at the bare minimum level to claim formal compliance with Basel III. Technically, however, they have been watered down at every possible opportunity.

The EU, already the only major jurisdiction to be found “materially non-compliant” by the Basel Committee in important aspects of the Basel III regime, is moving even further away from the international standard.

Mr Stiefmüller said:
“The readiness of European policymakers to deviate from the Basel Committee’s international standards to cater for the interest of European banks does not bode well for the future of international cooperation on trade and finance and sends precisely the wrong signal at the wrong time.

“This Package was meant to be the last big building block of the decade-long effort to learn from, and respond to, the lessons of the financial crisis of 2008. We now face the very real risk of having to face the next financial crisis with a framework that, albeit marginally improved, has not adequately repaired the flaws that caused the last financial cataclysm, not to mention the new challenges that have emerged since, such as the relentless rise of the shadow banking sector.”