The logic since the GFC is that capital ratios need to be higher, so if a bank gets into difficulty, there is a greater chance it can be managed to an outcome without needing government bail-outs or depositors loosing their shirts. This is one way of managing the “Too Big To Fail” problem. For example, in Australia, the big four have lifted their overall ratios from 10% to 14%. Tier 1 capital has also risen. But of course higher capital costs.
However, now it seems that European Banks (who have been struggling to lift capital ratios to a reasonable level – The 2016 stress testing is worth reading) may be let off the hook.
A speech by VP Dombrovskis at the European Banking Federation Conference: Embracing Disruption has suggested that revised regulations due soon are likely to water down capital requirements in Europe. Significantly, the speaker is in charge of Financial Stability, Financial Services and Capital Markets Union in the EU.
Equalising average risk weights across the world cannot be the answer, we need an intelligent solution which takes account of the individual banks’ situations and maintains a risk sensitive approach to setting capital requirements. Different banks have different business models which involve different levels of risk. This needs to continue to be recognised so as to preserve Europe’s diverse financial landscape.
The Commission remains committed to striking the right balance between supporting reforms at a global level and respecting the diversity of Europe’s financial sector. We will continue to strive for a financial framework that gives companies enough space to innovate and consumers the certainty they need. And we will follow through on our work to review our legislative framework and make targeted adjustments to support investment and sustainable growth in Europe.
A solution we could not support is one which would weigh unduly on the financing of the broader economy in Europe. At a time when we are focused on supporting investment, we want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe’s banking sector. This is a clear Commission position. It received strong backing from all EU countries in July. It is in line with the Basel Committee’s commitment.
With this work in mind, we will come forward with a revision of our own legislation the Capital Requirement Regulation and its sister directive CRD this autumn. Our aim has not changed. We want legislation which supports financial stability, but allows banks to lend and support investment in the wider economy.
