17 March 2017

CEPS: Pursuing multiple objectives with the banking reform package: Who can still follow?

Multiple objectives are being pursued by the European Commission with its amendments to prudential rules in the banking reform package. On the core capital requirements side, there is the further alignment of EU rules with the Basel rules, in the leverage and net stable funding ratio, for example, and the softening of capital requirements for trading positions. On the resolution side, there is the alignment of bail-in standards TLAC (total loss-absorbing capacity) and MREL (minimum requirement for own funds and eligible liabilities) – an issue for large globally active banks. And on the bank business models side, there is the recalibration of the capital requirements for bank exposures to SMEs and the introduction of proportionality in rules – the first time this has been formally invoked.

As the package is now going through the normal legislative procedure, the question is: Who can still follow? And this is not even the end of it. The review of internal models and their use is still ongoing and, once agreed upon internationally, will require further amendment to the Capital Requirements Directive (CRD). In other jurisdictions, such changes would be part of the discretion of the supervisor, but in the EU they need to go through formal changes to ensure a level playing field in the EU (of 27). With Brexit looming, and the SSM in shape, the competitiveness of EU-based banks needs to be taken into account at European and global level.

The package of measures, adopted on 23 November 2016, comprises amendments to four different measures: the Capital Requirements Directive (CRDIV) and Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Board Regulation (SRBR). The European Commission’s justification for the update is the Basel Committee standards, but a detailed comparison between the existing international and draft EU standards is missing. In the changes to the CRD/CRR, it states that it represents “a faithful implementation of international standards into Union law, subject to targeted adjustments in order to reflect EU specificities and broader policy considerations”.

In the Q&A release, the Commission addresses some of the differences on, for example, the net stable funding ratio (NSFR) and the trading book, but a detailed assessment would have been useful. It would also been useful as regards the comparison between TLAC and MREL, the bail-inable instruments at global and EU level in case of resolution, which is the main reason for the changes to the BRRD. [...]

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