EU states reach deal on reform of banking capital rules

REUTERS - European Union finance ministers reached an agreement yesterday on reforming bank capital rules, a major step towards boosting the bloc’s financial stability and a stepping stone towards a deal on a backstop for its bank-rescue fund in June.

The accord came after 18 months of heated debate among the 28 EU governments on how to apply new global bank capital rules that overhauled financial regulations after the 2007-2009 global crisis. 

“The Council (of EU finance ministers) has agreed a general approach on the banking package,” said Vladislav Goranov, the Finance Minister of Bulgaria, the country that holds the EU presidency, at a public session of a meeting of EU finance ministers in Brussels. 

The agreement paves the way for another breakthrough on the bloc’s bank-rescue fund, which ministers committed yesterday to equip with a backstop, although the final decision will be made only in June. 

The two measures are seen as interlinked because the banking capital rules are expected to reduce bank risk, a move that would in turn allow more sharing of risk among euro zone countries in the form of a common backstop to prop up the sector’s rescue facility, known as Single Resolution Fund. 

Under the accord, which still needs approval by EU lawmakers, European banks will have to abide by a new set of requirements aimed at keeping their lending in check and ensuring they have stable funding sources. 

Germany and France fully backed the deal, others accepted it with some political reservations, while Italy and Greece abstained. They argued that the deal on capital rules should be matched by an agreement on sharing banking risk by June. 

Italy’s position, although in line with past statements, was partly dictated by the fact that it has yet to form a government after inconclusive elections in March.

Under the deal, the euro zone’s agency for troubled banks, the Single Resolution Board, will be given a clearer mandate to set the level of capital buffers that banks should hold against the risk of failure.
The so-called Minimum Requirement for own funds and Eligible Liabilities (MREL), which introduces into EU legislation the global standard known as Total Loss Absorbing Capacity (TLAC), will be set at 8 percent of large banks’ total liabilities and own funds. 

The SRB will, however, be able to require higher buffers for banks it deems insufficiently safe, or a lower buffer for better capitalized institutions. 

Ministers agreed on a favorable capital treatment for large banks in countries that belong to the bloc’s banking union, such as France’s Societe Generale, Germany’s Deutsche Bank and Italy’s Unicredit, as their exposure to other countries of the bloc will be treated as a safer domestic exposure. 

Britain’s finance minister Philippe Hammond and other ministers from smaller EU states said that departure from global standards could heighten risk.

The new rules would also require large foreign banks to set up intermediate parent undertakings (IPUs) that would bring their EU operations under a single holding company. The move effectively mirrors U.S. rules and is seen as crucial to protecting the bloc’s financial stability against risks posed by major banks.  The measure would affect large financial institutions from the United States, Japan and Britain after it leaves the European Union.