Message from the CEO, Nina Schindler
From a co-operative banking perspective, the new banking package, published by the European Commission in October, comprises three high-impact legislative proposals, especially for a new CRD 6 and CRR 3. Estimates by the ECB revealed that the initial impact of the Basel III finalisation would be an increase in risk exposure amounts (REA) of around 25%, which would translate into a reduction in the euro area wide CET1 ratio of 2.5 percentage points. The European Commission proposals aim to mitigate these effects, especially via long implementation deadlines, but will nevertheless force banks to increase their capital base if they want to maintain their lending volumes at the current level.
While the compliance with international standards is important, much more is at stake: the considerable reduction of banks’ lending capacity comes in the middle of an economic crisis and at the outset of an unprecedented economic transformation. The European Commission has estimated that 1 trillion of investments would be necessary to finance the ambitious goals of the green deal over the coming ten years. Every SME will have to make relevant investments and require funding for it. The aim of reforms must therefore be to avoid capital increases wherever possible.
In the coming months, the EACB will therefore enter into a constructive, but critical dialogue with the legislating bodies to bring forward its views on a faithful implementation of the Basel agreement and inform about the impact of the proposals in order to ensure that the right decisions are taken on a well-informed basis in the interest of the European citizens and economy.
3 Questions to Almorò Rubin de Cervin, Head of the Banking Regulation and Supervision Unit, DG FISMA, European Commission
Almorò Rubin de Cervin is the Head of the Banking Regulation and Supervision Unit in DG FISMA in the European Commission. An economist, graduated from Bocconi, he has been at the European Commission since 2000 where he has worked on SME finance related issues in the industry and competition departments. He has been working on financial services since 2010, most of the time on policy coordination and international issues, notably leading on the financial services aspects of Brexit. He has also had a stint on macro-prudential policy. He has taken up the new position on the 1st of June 2021, steering the adoption of the Banking Package by the European Commission at the end of October.
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- For more than two years, there were intensive discussions on how Basel III should be implemented in Europe, with many wishes often diverging. How did you try to ensure the best balance between prudential considerations, stakeholder requests and financing of the economy, and what are your expectations on the future negotiations?
The banking package published on 27 October follows extensive preparatory work, impact analysis and consultation with numerous stakeholders. As a result, it strikes a delicate balance between several objectives.
Most notably, it implements the Basel III international standards faithfully without leading to a significant increase in capital requirements on average. It takes into account a number of EU specificities, with targeted adjustments tailoring the standards to the distinctive features of the EU banking sector and economy. We are therefore sending a clear signal that the EU remains firmly committed to its international commitments whilst taking into account legitimate concerns of stakeholders and giving them enough time to adapt to the new rules. In the current context, our intention is also to avoid any constraints for our banking sector’s ability to support the economic recovery in the coming years.
That said, the lesson learnt from the crises is that it is imperative that we continue our work on long-term, structural issues to make the EU financial sector more resilient to adapt to new challenges and weather future crises. A robust prudential framework, based on the final Basel III reforms, is instrumental to ensure this. The banking package also contains a number of measures to keep the prudential framework fit for purpose in terms of sustainability risks and in terms of supervision, including for third-country branches. Those proposals reflect the views of stakeholders from both the EU banking and supervisory community and follow a proportionate, evidence- and risk-based approach.
As we have been carefully listening to stakeholders in the preparatory phase, we count on them to proceed constructively and swiftly with the negotiations. The initial feedback received after the presentation of the package has been rather positive.
- Key elements of the proposals aim to implement the Basel agreement. Others are instead addressing other aspects such as cryptocurrencies and ESG risks. How can it be ensured that the level playing fields in the global context is maintained on those matters? And how do you see the possibility that certain risks migrate outside of the banking sector where it might become more difficult to tackle them?
As proponent of international regulatory cooperation, the European Commission is fully supportive of the ongoing work undertaken by the Basel Committee on climate-related risks and risks arising from the use of crypto-assets. Global challenges call for global solutions, and cooperation and coordination at the Basel Committee is the best way to ensure an international level playing field for banking.
The EU is at the forefront of sustainable and digital finance. The related work by the European Commission and EU supervisors is actively contributing to the international discussion. At the same time, the measures proposed in the banking package do not front run the conclusions of the Basel Committee’s work on climate-related risks and crypto assets. We have also mandated EBA to do an in-depth analysis on climate related issues, as well as to provide advice on certain aspects of the interaction with digital finance.
The possibility that certain of risks migrate outside the prudential framework cannot be ignored, with the risk that they would not be supervised and mitigated. The conclusions of the assessment performed by the European Banking Authority will shed some light on this potential risks and how to address them.
- How will the upcoming revision of the macroprudential framework interact with the banking package and will convergence be ensured?
The banking package contains a limited number of very targeted amendments to the macro-prudential framework, as a direct consequence of implementing the final Basel III reforms. For example, this is the case of the amendments necessary to the Pillar 2 framework and the Systemic Risk Buffer to ensure that risks which are eventually addressed by the output floor are not double-counted.
However, broader and more structural issues will be tackled in the dedicated review of the macro-prudential framework, as provided by Article 513 of the CRR. The European Commission recently launched a targeted consultation to external stakeholders to gather evidence about the current framework in view of that review and also sent a Call for Advice to the European Banking Authority to analyse a number broad areas in order to improve that framework.
Second Opinion from Johannes Rehulka, Managing Director, Association of Austrian Raiffeisenbanks
Johannes Rehulka is Managing Director of the Association of Austrian Raiffeisenbanks. He started his career at the University of Vienna in the Department of European Law. After 3 years he joined the political cabinet of the Austrian minister of justice and was deputy head of the cabinet. After more than 3 years he joined the Association of Austrian Raiffeisenbanks. Johannes Rehulka is Managing Director since 2014. Over the course of his career has gained extensive experience in the field of banking regulation with a special focus on CRR, CRD, Deposit Guarantee Schemes and banking resolution. He was member of the supervisory board of the national deposit guarantee scheme and is currently also member of the Board of the Raiffeisen Deposit Guarantee Scheme in Austria.
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The EACB acknowledges the European Commission’s efforts to reduce the expected impact of the reforms on the EU banking and credit markets and economy, while remaining compliant with the spirit of the global agreement, but further efforts are necessary.
European banks are in competition with banks from other jurisdictions and it is therefore of utmost importance to ensure equal conditions globally.
As the first major jurisdiction to unveil implementation plans, a 2025 start date and a sufficiently long period before all elements are fully phased-in are absolutely necessary given the massive efforts expected from EU banks and the uncertainty around plans elsewhere. Banks will start calculating and disclosing “fully loaded” CRR3 ratios before the end of phase-in, becoming bound to fully loaded requirements ahead of time. A sign of capital shortfall at the end of transitionals would negatively impact investor confidence early on, affecting banks’ ability and need to raise capital (or bail-in debt) and restricting lending capacity.
We strongly support the proposal to only apply the output floor at the highest level of consolidation. The SSM chair repeatedly warned that, if the output floor were to be applied at solo level, the EU banking market would fragment further and reduce banking groups’ flexibility to allocate capital internally.
EACB also strongly supports the 100% risk weight (RW) for equity exposures within a group or an institutional protection scheme according to Article 49(4) CRR: this is essential to the well-functioning of cooperative banking groups and networks. The possibility to assign 100% RW for “strategic” equity exposures to entities where the institutions have been a shareholder for six consecutive years is key (Art. 495a Para 3 CRR). This should be further refined: a 100% RW for strategic holdings should apply regardless of the industry (including insurance) and date when they are incurred and be made permanent.
The aim to further embed proportionality in the framework, like producing disclosures of small and non-complex institutions directly at the EBA via supervisory reporting sets, is appreciated. However, this contrasts with other elements, like the proposed extension of ESG disclosures to SNCIs.
Finally, the choice to preserve the SME and infrastructure supporting factors is vitally important and appreciated, especially since other elements might lead to reduced credit supply. The same applies to the CVA exemptions. The choice not to implement a hard granularity criterion for the retail portfolio is appropriate, allowing smaller banks not to be put at a disadvantage.
With regard to ESG risks EACB would like to stress that supervisory discretion should not be left unchecked. The wording of certain provisions leaves a very wide room for interpretation. Broad consideration of policy objectives and transition trends for supervisory action would leave institutions unable to properly define how to chart their strategy and milestones and to which supervisory expectations to adhere and also supervisors would be left without clear guidance.