21 November 2013

Bloomberg: EU risks violating bank capital pact, Basel member says

The EU’s plans to apply a worldwide pact struck by the Basel group fall short in multiple areas, from requirements applied to government debt to treatment of loans to small businesses, Cerps said in an interview on November 19. The Basel group is set to probe the EU’s compliance with the rules in a peer review to be completed next year.

“It’s quite clear that there are some things that are not Basel compliant, according to my view", Cerps said. “It’s important that the review team does a thorough job.” “There are a number of issues where the previous report that has been published identified non-compliance", Cerps said. “Sweden had been very vocal about the need to address those gaps.”

The US will face a similar probe next year that should be equally rigorous, according to Cerps, who said that he doesn’t want to prejudge the work of the team that assesses the EU. Of the reviews completed so far, the committee has found China, Japan, Singapore and Switzerland’s measures to be in general compliance with the Basel standards. “The EU’s implementation is fully in line with the spirit and level of ambition of Basel III", Chantal Hughes, a spokeswoman for Barnier, said by e-mail. “We said at the time that we weren’t in agreement with the findings of the preliminary peer review, and stand ready to provide the Basel committee with all necessary information and explanations on how we plan to apply Basel III", she said.

The EU is set to phase in its version of the Basel accord, known as Basel III, starting in January, and the rules will fully apply as of 2019. “Obviously it’s not going to be the same review team, it may be a different methodology, but the problems of material non-compliance are still there", Nicolas Véron, fellow at the Brussels-based Bruegel research group, said in a telephone interview. “One can expect the Basel committee to be consistent.” “My expectation is that the US will be found compliant and that the EU will be found non-compliant", with Basel III, he said.

Basel III more than triples the minimum amount of core capital that internationally active banks must have to at least 7 per cent of their risk-weighted assets. The pact also seeks to tackle other weaknesses exposed by the 2008 financial crisis. “The rules of the game are that the Basel regulations set identical minimum standards for internationally active banks", Cerps said. Not fully implementing the rules for these lenders for the sake of also applying them to smaller banks “is in my view not compliant with the spirit of Basel", he said.

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