Bank capital requirements: the ECB has said no to the requests presented by the Banking Federation of Europe (EBF) and by Oliver Wyman, global leader in management consulting wholly owned by Marsh McLennan (NYSE: MMC), to review the current capital requirements for banks to hold.
If satisfied, the requests could, according to the report by Oliver Wyman and the European Banking Federation (EBF), free additional lending capacity of up to €4-4.5 trillion, in the best-case scenario, thereby increasing by almost 30% the current lending volumes that euro area banks are currently disbursing.
But no.
Among other things, the ECB has also dismantled the assumption according to which these rules would put euro area banks at a disadvantage against its American rivals.
According to Eurotower supervision, an unjustified fear, given that the requests forwarded to the banks are “largely comparable”.
Indeed, the Eurotower continued in motivating its no: “The largest global European banks have even lower (capital) requirements than their counterparts across the Atlantic”a spokesman said, according to Reuters news agency.
Although the departments are different – the Governing Council led by Christine Lagarde decides on rates, Banking Supervision led by Andrea Enria decides on bank rules – it can be said that the ECB is nonetheless snubbing not only requests to curb rate hikes in the ‘Eurozone – which mainly see Italy as the sender, but also those aimed at making European banks more competitive.
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“It is also debatable whether less stringent capital requirements would translate into higher loan disbursements: what has been demonstrated is that low capital levels lead banks to cut lending sharply during times of crisis, thus making the adverse impact on the economy more profound,” explained the ECB.
Below is the request from the study that analysed the regulatory and supervisory framework of the European Union banking system compared to the American one and the impact this has on the financing of the economy and on the profitability of the banks themselves.
Bank capital requirements too strict? I study
According to the report, a review of current capital requirements and supervisory processes in line with those observed in the US could free up up to 4 trillion euros of credit capacity, which could be used to finance the green and digital transition and to increase the competitiveness of the European economy.
So he had pointed out Ana Botìn, president of the EBF and executive president of Banco Santander:
The European banking sector is strong and resilient and we are well positioned to help Europe address the challenges it is facing, including the need to grow. Without growth, it will be very difficult to carry out the projects related to defense and security, public services and the green transition that we all want and need. European banks are ready to commit more capital to support this growth, but the regulatory and supervisory framework need not create more constraints than in other regions, including the United States. If Europe is to compete successfully in today’s global markets and fully seize the opportunities created by the green and digital transitions, we need to ensure we have systems in place that support this goal”.
Talking too Claudio Torcellan, Market Leader South East Europe di Oliver Wyman:
At a time when Europe is deciding how best to respond to the new macroeconomic scenario and is planning the transition to a greener economy, reflecting on capital requirements for banks and supervisory processes could boost credit for the economy and facilitate the development of capital markets. With well-orchestrated interventions, authorities could make rapid progress in enabling European banks to lend more money now.
The study demonstrated that the European banking system’s credit-granting capacity disadvantages compared to the USA:
“The European Union’s approach to determining capital requirements is more complex, gives the legislator more discretion and can be perceived as less transparent – reads the report – The resulting uncertainty is one of the reasons why European banks tend, on average, to hold onto excess capital. To this should be added that, generally and considering that the sample is made up of subjects that differ greatly from one another also in terms of business model, European banks must submit to stricter capital requirements than their US counterpart.”
“Furthermore, it is expected that the new requirements required to fully implement Basel III ethe increase in reserves linked to the climate issue they will penalize our banks more than those overseas”.
Or?
“Contributions to guarantee deposits and to resolution funds from the EU and individual member states are about double those of US banks. The European banking sector fails to meet the cost of capital, while the US one records a profitability that stands at pre-crisis levels”.
Particularly “in the Eurozone there are still some structural obstacles to consolidation, which prevent banks from creating synergies between markets. The EU capital market union is still far behind and this prevents the development of a securitization market that would guarantee banks a much greater credit capacity “
“The report suggests that a regulatory framework that better balances promoting economic growth, boosting productivity and maintaining financial stability, and would allow financial services in the Eurozone to help the Union to face the current challenges”.
Because of this the European Banking Federation has compiled a list of suggestions for the authorities for an update of the regulatory framework, more conducive to growth:
- Policymakers should redouble their efforts to complete the banking and capital markets union. They should also simplify the current resolution regime, which is too complex and costly.
- Policymakers should also promote the European securitization market, given that today – even including the UK – it is 17 times smaller than the US. A well-structured securitization market would allow banks to have less congested balance sheets and to free up capital, transferring the risk to investors.
- Supervisory authorities should put more emphasis on making processes leaner and more efficient (think for example of the SREP – Supervisory Review and Evaluation Process – or stress tests) and be more vigilant on violations of the level playing field in individual EU countries . As Basel III is implemented, authorities need to ensure that EU banks are not at a disadvantage in the global game.
But for now the ECB (which is responsible for overseeing euro area banks) turned a deaf ear.