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16 April 2010

EFR responded to the BCBS consultations on “Basel III” – liquidity and capital requirements


The European Financial Services Round Table is very concerned that consequences of the Basel Committee’s capital and liquidity proposals for the economy will be severe as the banking industry’s capacity to finance the economy would be strongly hampered by the proposed measures.

This is a response by the banking members of the EFR. References to the EFR should be read as references to the banking members of the EFR.

• The EFR welcomes the efforts of the Basel Committee to address the regulatory weaknesses revealed by the financial crisis and the opportunity to respond the consultation. We support the general aim of developing an internationally harmonised framework for capital requirements and liquidity management.

• However, the EFR is very concerned that consequences of the Basel Committee’s capital and liquidity proposals for the economy will be severe, threatening economic recovery and future growth, as the banking industry’s capacity to finance the economy would be strongly hampered by the proposed measures. Indeed, preliminary analysis of the proposals by individual banks and banking associations reveals a huge impact on the banking industry. The proposals, which go beyond tackling weaknesses observed during the financial crisis, could entail a de facto limitation of the cross-border universal banking business model, doing away with the proven value of that model for facilitating a globalised real economy and for diversifying risk. Therefore, EFR Members urge regulators to use the full impact analysis of the capital and liquidity proposals not just for the purpose of calibration and transition, but for a more fundamental reconsideration of which measures are needed and how they are presented.
 
• The effect on credit to the real economy is a particular concern for the EU, as the European economy, in contrast to the US, is primarily financed by credit rather than through capital markets. Economic growth prospects will likely suffer significantly as the cost of capital to non-financial companies and households will usually be above that of the financial sector. As for the financial sector, the proposed restrictions on the structure of capital will be more problematic for EU financial institutions, as the nature of capital markets in the EU makes it more difficult for them to raise common equity than for US financial institutions. Therefore, the EFR would strongly support EU efforts to undertake its own impact assessment, in addition to the Basel Committee's general exercise.

• Given the broad array of mostly complex measures to be assessed, as well as the expected consequences for the real economy, the EFR calls upon the Basel Committee and the EU to take sufficient time for high quality assessments, delaying the envisaged year-end 2010 deadline for calibration if necessary. These exercises should involve appropriate consultation of stakeholders, including the financial services industry.




 


© EFR - European Financial Services Round Table

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