10 October 2011

EBF: Key messages on the European Commission's CRD IV proposals

It is essential for further work on the CRD IV to observe a range of basic guiding principles which can be summarised as follows:

1. The cumulative impact of the new measures cannot be ignored

Whilst EBF has acknowledged the various impact studies that have estimated the costs and benefits of the Basel III regulatory package, they remain worried about the lack of any analysis assessing the cumulative impact of the combination of proposals that have been put forward (i.e. Basel III; ex-ante funded DGS; bank tax; additional buffer requirements for SIFIs; CCP clearing; cross border crisis management; possible changes to International Financial Reporting Standards that will impact on the definition of regulatory capital; Solvency II). A quantitative feedback to the recent QIS exercises is also missing so far.

Research is required to provide policy-makers with a view on how the aggregated effects of all those impressive proposals would be likely to influence banks' ability to finance economic recovery, particularly in times when banks' balance sheets remain vulnerable and European governments have limited scope to stimulate the economy.

2. The competitive position of the European industry should not be put at risk

As it is essential that Basel III should be implemented globally, EBF welcomes the Commission's proposals for being closely aligned with the Basel Committee's package. It needs to be highlighted that the implementation of the Basel III package in Europe will have a more severe economic impact than elsewhere because of its specificities, including the structure of Europe's financial markets, the importance of SMEs for the European recovery and growth, the lack of government-sponsored institutions such as Fannie Mae and Freddie Mac in the US, whose functioning alleviates the balance sheets of US banks, the lack of alignment of accounting practices. As a consequence, EBF believes that CRD IV needs to transpose the Basel III package in a more flexible way than is being proposed, to take those European specificities into account.

Finally, EBF is deeply concerned about the ability and willingness of the US Authorities to implement Basel II, Basel 2.5 and Basel III in a timely way. EBF therefore believes it to be highly appropriate to extend the scope of application of the Review Clause enshrined in the regulation to all the measures covered by the regulation and the Directive.

3. CRD IV should refrain from creating new competitive distortions across the EU

The European Banking Federation has always taken the view that achieving enhanced regulatory convergence across the EU is essential for a Single Market in financial services, as it contributes to promoting a level playing field amongst institutions and reducing the administrative burden incumbent on institutions that provide financial services on a cross-border basis. EBF therefore strongly welcomes the objective set by the European Commission to create a Single Rulebook, and concurs with the view taken that a regulation is an appropriate legal instrument to achieve that goal. At the same time however, EBF was disappointed to note that CRD IV intends to introduce additional national discretions for Member States.

This being said, EBF nevertheless fully subscribes to the view held by many that the creation of a Single Rulebook encompasses differentiation in the area of mortgage lending practices as the latter are dissimilar across Europe. Differences across the EU more particularly arise from national specificities, such as state guarantees, mortgage execution possibilities and other legal procedures, definitions of default in the IRB approach, the balance in local mortgage markets between floating or fixed interest rates, and penalty payments for early redemption.

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© EBF