EU may adopt global rules on bank capital

BRUSSELS • The European Commission (EC) yesterday proposed new rules for banks, in line with capital requirements agreed by global regulators - but with some tweaks, in a sign of a growing fragmentation of international financial controls.

Unveiling a large legislative package, the EU executive arm proposed adapting the bloc's rules on capital requirements and loss- absorbing buffers to agreements reached earlier in the Basel Committee of global financial regulators, which oversees US, European and Japanese lenders.

But instead of simply replicating the rules agreed with international partners, the EC proposed several changes and some new provisions that may upset non-EU banks and regulators.

"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," said Mr Valdis Dombrovskis, the EU commissioner on financial services.

The move comes as the European Union is battling a new set of reforms expected to be adopted by the Basel Committee in the coming weeks on banks' models for calculating risks, which the bloc thinks may favour US banks.

The trend towards an increasing fragmentation of global financial rules was underlined by US President-elect Donald Trump's campaign statements about possibly reviewing the regulations introduced to reduce bank risks after the 2007-08 financial crisis.

"We expect our international partners to stick to globally- agreed standards," Mr Dombrovskis said when asked about the possible intentions of Mr Trump on banking regulation.

However, in a further sign of diverging agendas and conflicting interests between the EU and the US, Brussels has also decided to propose higher capital requirements for US and other top foreign banks operating in the EU, saying this measure would increase financial stability. The EC has also proposed a new set of requirements for European banks to make them safer.

Some of the proposals include requiring EU lenders to hold a binding 3 per cent leverage ratio meant to reduce excessive lending. The measure will be integrated at a later stage with higher requirements for systemic banks.

Banks would also have to meet a so-called Net Stable Funding Ratio aimed at limiting excessive reliance on short-term funding that was among the causes of the global financial crisis.

Brussels is also proposing tighter capital requirements on bank trading books of shares, bonds or derivatives, because of their higher volatility. European banks welcomed the proposals as they softened some global requirements. The proposals need the approval of EU states and European lawmakers to become law.


A version of this article appeared in the print edition of The Straits Times on November 24, 2016, with the headline 'EU may adopt global rules on bank capital'. Subscribe