Europe’s financial regulation chief has pledged to delay tough new capital rules for banks, saying that support for lending has to be the overwhelming priority in the fight against coronavirus.
In remarks likely to be well received by Europe’s financial sector, Valdis Dombrovskis said now was not the time to push ahead with standards that would force banks to raise additional equity.
He applauded moves by global regulators on Friday to defer the rollout of new capital standards by one year, confirming Brussels would make sure European banks could benefit.
“It’s a welcome development because it gives us more time,” Mr Dombrovskis, the European Commission’s executive vice-president in charge of economic and financial policy told the Financial Times. “Our intention of course is to use this possibility,” he said, adding that the move would help ensure “that banks are financing the real economy”.
European policymakers are grappling with how to keep credit flowing during the crisis as millions of businesses put their operations on hold and the economy is braced for a deep recession.
Governments have already introduced loan guarantee programmes, while supervisors have freed up lending capacity by reducing the capital buffers banks must have to cover possible losses on their loans. EU officials note that the bloc’s economy is particularly dependent on bank financing because of its under-developed capital markets.
Mr Dombrovskis said Brussels would now “reassess” its policy timetable for 2020, which had included making legal proposals in the second quarter to implement the latest round of international capital rules set by the Basel Committee on Banking Supervision.
“Already now we are adjusting our work programme, postponing certain other work streams, and having an extra year here of course is helping,” he said. “We will need to go through now and see exactly what is needed.”
The Basel rule changes, which overhaul standards for how banks should measure the risk of losses on their investments, have been the subject of an intensive lobbying campaign by the sector which has warned they could lead to an increase in capital requirements forcing banks to rein in lending.
Regulators insist that the measures, which complete the Basel III rule book drawn up after the 2008 financial crisis, will boost banks’ resilience to shocks.
The European Banking Authority, an EU watchdog, estimated in December that the new standards could increase banks’ capital requirements by 23 per cent compared with a June 2018 baseline, triggering a shortfall in total capital of €124.8bn.
But Mr Dombrovskis said the impact would ultimately depend on policy choices made at EU level, given that the standards needed to be implemented through European law.
He pointed out that the G20 had agreed not to let this round of Basel rulemaking create a further significant increase in overall capital requirements across the sector.
“That’s something we are looking very carefully at”, he said.
Basel agreements only have legal effect in the EU once the European Parliament and national governments have approved legislation on how to apply them. The commission is responsible for making those legislative proposals.
Global central bank and regulatory chiefs announced on Friday that they had postponed the implementation date for swaths of Basel rulemaking by one year. The change affected several pieces of regulatory work concluded between December 2017 and January 2019.
The move means that countries now have until January 2023 to put in place many of the rules, which revise how banks should measure the capital they need to cope with credit, market and operational risks.
Measures to restrain banks’ use of their own internal models to measure capital requirements — the most contentious part of the plans — were already set to be phased in over a longer timeframe through to 2027. They would now need to be fully applied from January 2028.