EU supervisors urge implementation of global banking rules

By Francesco Canepa and Huw Jones

FRANKFURT/LONDON (Reuters) - The European Central Bank and national central banks across the European Union on Tuesday called for the bloc to fully implement remaining international banking capital rules agreed to prevent a repeat of the global financial crisis.

EU legislation to implement the final part of rules known as Basel III is due soon after being delayed by the coronavirus crisis and its impact on the European economy.

In an open letter, nearly two dozen central bankers and regulators urged the Commission to stick to "the letter and the spirit" of the rules, which have been the object of intense lobbying from a banking industry keen to reduce its capital burden.

"We, as prudential supervisors and central banks in the EU, very much support a full, timely and consistent implementation of all aspects of this framework," the signatories said.

"The pandemic shows that more resilient banks are better able to support the real economy, even during times of crisis."

The open letter, addressed to Financial Services Commissioner Mairead McGuinness and her top official John Berrigan, was signed by the heads of institutions from all large EU countries with the exception of France.

Bank of France Governor Francois Villeroy de Galhau said in reaction to the letter that he "obviously" supported the "full, consistent and timely" implementation of the new rules.

"But the timing of this letter is not helpful as we do not yet know the Commission’s proposal and hence cannot judge its substance," he added.

In a separate letter to McGuinness, the European Central Bank and the European Banking Authority, the bloc's banking watchdog, emphasised the need for "timely and faithful" implementation of the capital rules.

"It is therefore crucial to avoid implementation approaches that would be inconsistent with international agreements and, in addition, would leave shortcomings in the existing framework relating to specific risks unaddressed," the ECB and EBA letter said.

'STRINGENT INTERPRETATION'

Both letters defended the "output floor", which limits large banks' discretion in setting their own capital requirement, while warning against a "deviation" to a more flexible "parallel stack approach" defended by the European Banking Federation (EBF) on Tuesday as being compliant with Basel rules.

The EBF said the central banks were advocating an "extremely stringent interpretation" of the Basel rules, which contradicts a G20 mandate not to significantly increase capital requirements.

"We must strike a balance between the capital requirements and financing the EU economy," the EBF said in a statement.

Full implementation of the output floor would increase capital requirements by 18.5% for EU banks, leaving them with a 52.2 billion euro ($61.92 billion) capital shortfall, based on calculations by regulators at the EBA as of last December.

But the ECB and EBA said the overall increase in capital because of the new rules would not be significant, save for a few banks that have traditionally benefited most from the current rules.

A spokesperson for McGuinness said a legislative proposal due soon will meet the EU's international commitments to implement Basel, but with adjustments to reflect the European banking sector.

"The overarching objective will be to address remaining deficiencies in the banking prudential framework without incurring a significant increase in capital requirements overall," the spokesperson added.

The central bankers also upheld a standardised approach to credit risk and said EU-specific deviations should be minimised.

(Additional reporting by Huw Jones and Leigh Thomas; Editing by Raissa Kasolowsky, Jane Merriman and David Goodman)