Banks have a central role in financing the economy and for promoting growth and jobs. They are a key source of funding for households and businesses. In the wake of the financial crisis, the EU pursued an ambitious reform of the financial regulatory system to bring back financial stability and market confidence. Today’s proposals aim to complete this reform agenda by implementing some outstanding elements, which are essential to further reinforce banks’ ability to withstand potential shocks. The proposals also fine-tune some aspects of the new regulatory framework where necessary to make it more growth-friendly and proportionate to banks’ complexity, size and business profile. It also includes measures that will support SMEs and investment in infrastructure.
Commission Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union, said: “Europe needs a strong and diverse banking sector to finance the economy. We need bank lending for companies to invest, remain competitive and sell into bigger markets and for households to plan ahead. Today, we have put forward new risk reduction proposals that build on the agreed global standards while taking into account the specificities of the European banking sector.”
The measures proposed today are also part of Commission’s ongoing work to reduce risk in the banking sector, as set out in the Communication “Towards the Completion of the Banking Union” (November 2015). They are also in line with the conclusions of the ECOFIN Council in June, where the Commission was invited to put forward relevant proposals no later than the end of 2016.
The proposals amend the following pieces of legislation:
- The Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) which were adopted in 2013 and which set out prudential requirements for credit institutions (i.e. banks) and investment firms and rules on governance and supervision;
- The Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) which were adopted in 2014 and which spell out the rules on the recovery and resolution of failing institutions and establish the Single Resolution Mechanism.
Today’s measures implement international standards into EU law, while taking into account European specificities and avoiding undue impact on the financing of the real economy. They also take into account the results of the Call for Evidence.
The proposals in detail
The proposals include the following key elements:
1. Measures to increase the resilience of EU institutions and enhancing financial stability
The proposals incorporate the remaining elements of the regulatory framework agreed recently within the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). They include:
- More risk-sensitive capital requirements, in particular in the area of market risk, counterparty credit risk, and for exposures to central counterparties (CCPs);
- Implementing methodologies that are able to reflect more accurately the actual risks to which banks are exposed;
- A binding Leverage Ratio (LR) to prevent institutions from excessive leverage;
- A binding Net Stable Funding Ratio (NSFR) to address the excessive reliance on short-term wholesale funding and to reduce long-term funding risk.
- A requirement for Global Systemically Important Institutions (G-SIIs) to hold minimum levels of capital and other instruments which bear losses in resolution. This requirement, known as ‘Total Loss-Absorbing Capacity’ or TLAC), will be integrated into the existing MREL (Minimum Requirement for own funds and Eligible Liabilities) system, which is applicable to all banks, and will strengthen the EU’s ability to resolve failing G-SIIs while protecting financial stability and minimising risks for taxpayers. It proposes a harmonised national insolvency ranking of unsecured debt instruments to facilitate banks’ issuance of such loss absorbing debt instruments.
2. Measures to improve banks’ lending capacity to support the EU economy
In particular, specific measures are proposed to:
- Enhance the capacity of banks to lend to SMEs and to fund infrastructure projects;
- For non-complex, small banks, reduce the administrative burden linked to some rules in the area of remuneration (namely those on deferral and remuneration using instruments, such as shares), which appear disproportionate for these banks;
- Make CRD/CRR rules more proportionate and less burdensome for smaller and less complex institutions where some of the current disclosure, reporting and complex trading book-related requirements appear not to be justified by prudential considerations. The Call for Evidence and the analysis carried out by the Commission showed that the present framework can be applied in a more proportionate way, taking into account their specific situation.
3. Measures to further facilitate the role of banks in achieving deeper and more liquid EU capital markets to support the creation of a Capital Markets Union
Specific adjustments to the proposed measures are envisaged in order to:
- Avoid disproportionate capital requirements for trading book positions, including those related to market-making activities;
- Reduce the costs of issuing/holding certain instruments (covered bonds, high quality securitisation instruments, sovereign debt instruments, derivatives for hedging purposes);
- Avoid potential disincentives for those institutions that act as intermediaries for clients in relation to trades cleared by CCPs.
These legislative proposals will now be submitted to the European Parliament and to the Council for their consideration and adoption.
In its Communication of 24 November 2015, the European Commission committed to bringing forward legislative proposals based on international agreements in order to address identified weaknesses in the existing prudential framework. The particular commitment was part of the package of risk-reducing measures aimed at achieving further progress in completing the Banking Union.