EU Backs Watering Down of Final Basel Bank Capital Rules

By Huw Jones

LONDON (Reuters) -European Union member states have backed a temporary watering down and two-year delay to 2025 for the final leg of the globally agreed Basel III bank capital rules, the Czech EU presidency said on Tuesday.

EU states will now negotiate a final deal with the European Parliament in early 2023.

“One of our main goals was to avoid impacts on European banks that could reduce their ability to finance the European economy,” Czech finance minister Zbynek Stanjura told a meeting of EU finance ministers.

“It shows once again our commitment to international standards and multilateral cooperation,” added Valdis Dombrovskis, executive vice president of the European Commission, which drafted the proposals eased by EU states.

Finance ministers for Germany and France said the package struck the “right balance”, with Spain adding that it reflected “idiosyncrasies” in Europe’s banking sector.

“This flexibility gives banks enough time to adjust to these new rules,” German finance minister Christian Lindner said.

Most of the Basel III rules, a set of tougher capital rules for banks after the global financial crisis more than a decade ago, have already been implemented.

European banks have lobbied hard for a temporary watering down of some of the remaining Basel III features, arguing they already hold enough capital and that higher requirements would crimp lending to the economy.

EU ministers backed a two-year delay to the start date for rolling out the final rules, pushing it back to January, 2025.

The revised rules would give relief until 2032 to largely neutralise capital increases for some banks holding low-risk mortgages.

Based on a new “output floor” for determining capital levels, EU states which host banks headquartered elsewhere in the bloc can insist that a certain amount of group capital is held locally.

Smaller banks would benefit from simpler disclosure, and EU states pushed back against attempts at stricter EU harmonisation in checking whether top bank staff are ‘fit and proper’.

Markus Ferber, a German centre-right member of the European Parliament, said the member state position is a “pragmatic step in the right direction” to tailor global rules that are a poor fit for Europe’s banks.

EU states also watered down proposals from the European Commission to toughen up requirements on branches of foreign banks in the bloc, meaning less pressure on them to open a subsidiary with the extra capital and EU supervision that brings.

Luxembourg said the more “rationalised” approach to third country branches ensures an “open economy” with more diversified sources of funding for EU economies.

‘CRACKING THE DYKE’

The watering down comes despite warnings last week from the European Central Bank, which regulates top euro zone lenders, and the bloc’s banking watchdog EBA, saying the bloc could fall foul of global rules.

EBA said in September that banks in the EU collectively need only a further 1.2 billion euros to meet Basel III in full by 2028.

But on Tuesday, ECB Vice President Luis de Guindos told ministers he was concerned about deviations from Basel III at a time when the EU economy faces downside risks.

“Each deviation may only appear as an isolated crack in the dyke protecting the banking system, but together these numerous cracks erode soundness and stability,” de Guindos said.

The Netherlands cautioned that the temporary deviations must stay temporary.

The EU is ahead of Britain and the United States in setting out how it wants to implement the final leg of Basel III.

The Bank of England has said it will also begin rolling out the rules from 2025, but that it won’t match some of the easing being approved in the EU.

The BoE is likely to keep a close eye on what the Federal Reserve decides given the big presence of U.S. investment banks in London.

(Reporting by Huw Jones, Editing by Alex Richardson, David Goodman and Ed Osmond)