ECON agreement on banking package contains distinct moves to deregulation

Brussels, 21 June 2018 – The ECON Committee of the European Parliament on Tuesday adopted a compromise on the Banking Package proposed by the European Commission in November 2016. The Package comprises substantial amendments to the Capital Requirements Regulation and Directive (CRR/CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Regulation governing the Single Resolution Mechanism (SRMR).

Finance Watch’s Senior Research and Advocacy Advisor, Christian M. Stiefmüller, said:

“Billed as the incorporation of the last round of the Basel Committee’s Basel III reforms into EU law the compromise text bears all the hallmarks of two years of relentless lobbying by the banking industry. The compromise, which will now be negotiated in Trilogue, is a minimalistic and reluctant attempt at combining formal compliance with Basel III with a distinct move towards deregulation. Every time a balance had to be struck between financial stability and the commercial interests of the banking sector, financial stability has reliably come out in second place.”

While the compromise makes welcome progress in some areas  notably proportionality for smaller banks, and environmental, social and management issues – the provisions concerning financial stability and moral hazard are disappointing.

The bank recovery and resolution regime, last line of defence against a systemic crisis after the sad demise of the proposed Bank Structural Reform Regulation, has been further weakened by a proposed approach to creditor subordination that blithely ignores fundamental differences between bank customers, suppliers and investors and is bound to render the “bail in” tool practically unworkable in many cases. MREL, the amount of funds that may be used for recapitalising a troubled bank, is being capped and resolution authorities’ discretion severely curtailed. By blunting their most critical instruments policymakers have made the resolution authorities’ near-impossible task that little more impossible still.

At the same time, known problem areas, such as the “precautionary recapitalisation” clause that has now been used repeatedly to justify the use of taxpayers’ money to prop up ailing banks – which has been overdue for review for two and a half years now – have not been addressed.

New rules on capital, in particular the leverage ratio as one of the few genuinely new concepts that were introduced as a result of the abject failure of the Basel II capital adequacy framework, are now being implemented at the bare minimum level to claim formal compliance with Basel III. Technically, however, they have been watered down at every possible opportunity.

The EU, already the only major jurisdiction to be found “materially non-compliant” by the Basel Committee in important aspects of the Basel III regime, is moving even further away from the international standard.

Mr Stiefmüller said:

“The readiness of European policymakers to deviate from the Basel Committee’s international standards to cater for the interest of European banks does not bode well for the future of international cooperation on trade and finance and sends precisely the wrong signal at the wrong time.

“This Package was meant to be the last big building block of the decade-long effort to learn from, and respond to, the lessons of the financial crisis of 2008. We now face the very real risk of having to face the next financial crisis with a framework that, albeit marginally improved, has not adequately repaired the flaws that caused the last financial cataclysm, not to mention the new challenges that have emerged since, such as the relentless rise of the shadow banking sector.”

ENDS

For further information or interview requests, please contact:
Charlotte Geiger, Communications Officer at Finance Watch, at   or +32 2 880 0430 or +32 474331031.

NOTES

European Parliament press releases:

Finance Watch materials on the banking package: 

ECON agreement on banking package contains distinct moves to deregulation

Brussels, 21 June 2018 – The ECON Committee of the European Parliament on Tuesday adopted a compromise on the Banking Package proposed by the European Commission in November 2016. The Package comprises substantial amendments to the Capital Requirements Regulation and Directive (CRR/CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Regulation governing the Single Resolution Mechanism (SRMR).

Finance Watch’s Senior Research and Advocacy Advisor, Christian M. Stiefmüller, said:

“Billed as the incorporation of the last round of the Basel Committee’s Basel III reforms into EU law the compromise text bears all the hallmarks of two years of relentless lobbying by the banking industry. The compromise, which will now be negotiated in Trilogue, is a minimalistic and reluctant attempt at combining formal compliance with Basel III with a distinct move towards deregulation. Every time a balance had to be struck between financial stability and the commercial interests of the banking sector, financial stability has reliably come out in second place.”

While the compromise makes welcome progress in some areas  notably proportionality for smaller banks, and environmental, social and management issues – the provisions concerning financial stability and moral hazard are disappointing.

The bank recovery and resolution regime, last line of defence against a systemic crisis after the sad demise of the proposed Bank Structural Reform Regulation, has been further weakened by a proposed approach to creditor subordination that blithely ignores fundamental differences between bank customers, suppliers and investors and is bound to render the “bail in” tool practically unworkable in many cases. MREL, the amount of funds that may be used for recapitalising a troubled bank, is being capped and resolution authorities’ discretion severely curtailed. By blunting their most critical instruments policymakers have made the resolution authorities’ near-impossible task that little more impossible still.

At the same time, known problem areas, such as the “precautionary recapitalisation” clause that has now been used repeatedly to justify the use of taxpayers’ money to prop up ailing banks – which has been overdue for review for two and a half years now – have not been addressed.

New rules on capital, in particular the leverage ratio as one of the few genuinely new concepts that were introduced as a result of the abject failure of the Basel II capital adequacy framework, are now being implemented at the bare minimum level to claim formal compliance with Basel III. Technically, however, they have been watered down at every possible opportunity.

The EU, already the only major jurisdiction to be found “materially non-compliant” by the Basel Committee in important aspects of the Basel III regime, is moving even further away from the international standard.

Mr Stiefmüller said:

“The readiness of European policymakers to deviate from the Basel Committee’s international standards to cater for the interest of European banks does not bode well for the future of international cooperation on trade and finance and sends precisely the wrong signal at the wrong time.

“This Package was meant to be the last big building block of the decade-long effort to learn from, and respond to, the lessons of the financial crisis of 2008. We now face the very real risk of having to face the next financial crisis with a framework that, albeit marginally improved, has not adequately repaired the flaws that caused the last financial cataclysm, not to mention the new challenges that have emerged since, such as the relentless rise of the shadow banking sector.”

ENDS

For further information or interview requests, please contact:
Charlotte Geiger, Communications Officer at Finance Watch, at   or +32 2 880 0430 or +32 474331031.

NOTES

European Parliament press releases:

Finance Watch materials on the banking package: 

Finance Watch publishes a new Policy Brief on the European Commission's plan to address banks’ non-performing loans

Brussels, 8 June 2018 – Finance Watch, the independent organisation that defends the public interest in financial reform, publishes today, as the feedback period ends, a detailed analysis of the European Commission’s package to tackle Non-Performing Loans (NPL).

In principle, Finance Watch supports the Commission’s endeavour to set out uniform, harmonised rules for the sale and management of NPL portfolios. Banks must provision for distressed loans in a prudent and timely way and non-bank purchasers and servicers of such loans must be regulated just as strictly as any other professional participant in the financial markets. However, we are of the view that it does not tackle the causes, only the effects.

In fact, NPLs are rarely ever an unfortunate, accidental by-product of an economic downturn. NPLs tend to occur in a concentrated manner, i.e. some banks are more likely to accumulate bad loans than others, due to poor risk management systems or risky business models.

By promoting the selling of NPLs to taxpayer-funded vehicles such as publicly funded bad banks, or by passing on their risk to capital market investors in a non-transparent and unsafe way through structured debt transactions (securitisation), there is a concern that Commission’s NPL initiative will end up perpetuating the vicious circle that develops when poorly-run banks are kept in business with taxpayers’ money.

Christian Stiefmueller, Senior Research and Advocacy Advisor at Finance Watch, commented:

“The financial crisis of 2008 should serve as a potent reminder of what happens when unsuspecting investors were sold complex, non-transparent securities whose primary raison d’être was to conceal the poor quality of the underlying assets they contain.

“Replace the phrase ‘non performing’ with ‘sub prime’ and we are back to the fatal and discredited game of ‘pass the parcel’ that was at the root of the last financial markets cataclysm.

“Securitising NPLs is not the panacea it is made out to be by banking sector interest groups and some policymakers. It is, more likely, merely a way of storing up trouble for later.”

Oliver Jérusalmy, Senior Research and Advocacy Officer at Finance Watch, said:

“Each NPL is a debt owed by a European citizen or business. Regardless of why these loans turned sour, debtors’ rights have to be preserved and adequately protected.

“With the sale of NPL portfolios to financial investors the need to protect borrowers, in particular consumers and small businesses, becomes even more urgent because the original customer relationship between debtor and creditor is cut, with the loan becoming purely a financial asset whose recovery value for the new creditor has to be maximised.”

Finance Watch’s key recommendations:

  • The first priority for legislators and supervisory authorities should be to ensure that banks’ loan origination, credit risk management and NPL management processes are adequately reported, regulated and properly supervised.
  • In the interest of providing better transparency and as an ‘early warning mechanism’ to flag any build-up of NPLs in specific segments of the economy we would also propose the inclusion of more granular reporting and disclosure on NPLs by banks, e.g. by geography and segment.
  • Banks that lack the financial resources to cope with their NPLs without having recourse to public funds should be restructured or resolved under the Bank Recovery and Resolution Directive (BRRD). Existing loopholes, such as the “precautionary recapitalisation” should be closed and the European Commission’s State Aid rules (the “2013 Banking Communication”) properly aligned with the BRRD as a matter of urgency.
  • A well-functioning, transparent and professional secondary market for NPLs could be an important part of the solution provided it does not undermine credit standards or lead to aggressive and inappropriate enforcement actions. Harmonised rules for NPL investors and credit servicers should be conducive to this effort.
  • High levels of consumer protection in debt collection practices must be included in the proposal. Furthermore, it is critical for the EU to ensure that all Member States introduce debt restructuring procedures (‘second chance’) and insolvency law frameworks that are capable of delivering fair and predictable outcomes within a reasonable period of time, at reasonable cost, while protecting vulnerable debtors, in particular households and small businesses.[1]

 

ENDS

For further information or interview requests, please contact:

Charlotte Geiger, Communications Officer at Finance Watch, at or +32 2 880 0441 or +32 474331031.

 

NOTES

As Europe emerges, slowly, from the wreckage of a series of financial crisis and economic crises that have rocked the continent, in particular its Southern edge, since 2012, its financial system continues to grapple with the aftermath.

After spending years in denial policymakers woke up, towards the end of 2016, to the realisation that European Union banks had piled up a staggering € 1 trillion of NPLs.

The slow rate of progress since then has prompted the European Commission to announce, on 14 March 2018 (see also EC press release), a package of measures intended to harmonise the approach towards NPLs across the EU and to speed up their resolution.

The package includes:

During the eight weeks after its publication, the European Commission has asked for feedback on the proposed Directive. The feedback period closes on 8 June 2018. The European Commission will present a summary of the feedback received to the Parliament and Council which are currently discussing the proposal.



[1] European households account for ca. EUR 6 trn of residential mortgage lending and ca. EUR 1 trn of consumer loans; of which a total of ca. EUR 350 bn are distressed loans. Over-indebtedness of private households is a genuine concern: it is socially and economically divisive and carries huge economic and social costs.

ECON agreement on banking package contains distinct moves to deregulation

Brussels, 21 June 2018 – The ECON Committee of the European Parliament on Tuesday adopted a compromise on the Banking Package proposed by the European Commission in November 2016. The Package comprises substantial amendments to the Capital Requirements Regulation and Directive (CRR/CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Regulation governing the Single Resolution Mechanism (SRMR).

Finance Watch’s Senior Research and Advocacy Advisor, Christian M. Stiefmüller, said:

“Billed as the incorporation of the last round of the Basel Committee’s Basel III reforms into EU law the compromise text bears all the hallmarks of two years of relentless lobbying by the banking industry. The compromise, which will now be negotiated in Trilogue, is a minimalistic and reluctant attempt at combining formal compliance with Basel III with a distinct move towards deregulation. Every time a balance had to be struck between financial stability and the commercial interests of the banking sector, financial stability has reliably come out in second place.”

While the compromise makes welcome progress in some areas  notably proportionality for smaller banks, and environmental, social and management issues – the provisions concerning financial stability and moral hazard are disappointing.

The bank recovery and resolution regime, last line of defence against a systemic crisis after the sad demise of the proposed Bank Structural Reform Regulation, has been further weakened by a proposed approach to creditor subordination that blithely ignores fundamental differences between bank customers, suppliers and investors and is bound to render the “bail in” tool practically unworkable in many cases. MREL, the amount of funds that may be used for recapitalising a troubled bank, is being capped and resolution authorities’ discretion severely curtailed. By blunting their most critical instruments policymakers have made the resolution authorities’ near-impossible task that little more impossible still.

At the same time, known problem areas, such as the “precautionary recapitalisation” clause that has now been used repeatedly to justify the use of taxpayers’ money to prop up ailing banks – which has been overdue for review for two and a half years now – have not been addressed.

New rules on capital, in particular the leverage ratio as one of the few genuinely new concepts that were introduced as a result of the abject failure of the Basel II capital adequacy framework, are now being implemented at the bare minimum level to claim formal compliance with Basel III. Technically, however, they have been watered down at every possible opportunity.

The EU, already the only major jurisdiction to be found “materially non-compliant” by the Basel Committee in important aspects of the Basel III regime, is moving even further away from the international standard.

Mr Stiefmüller said:

“The readiness of European policymakers to deviate from the Basel Committee’s international standards to cater for the interest of European banks does not bode well for the future of international cooperation on trade and finance and sends precisely the wrong signal at the wrong time.

“This Package was meant to be the last big building block of the decade-long effort to learn from, and respond to, the lessons of the financial crisis of 2008. We now face the very real risk of having to face the next financial crisis with a framework that, albeit marginally improved, has not adequately repaired the flaws that caused the last financial cataclysm, not to mention the new challenges that have emerged since, such as the relentless rise of the shadow banking sector.”

ENDS

For further information or interview requests, please contact:
Charlotte Geiger, Communications Officer at Finance Watch, at   or +32 2 880 0430 or +32 474331031.

NOTES

European Parliament press releases:

Finance Watch materials on the banking package: 

The announcement of a "separation stress-test" for Deutsche Bank shows good intentions from the regulator but is not enough to end "Too Big To Fail"

Deutsche Bank Taunusanlage 525

Deutsche Bank Twin Towers, the company's headquarters building in Frankfurt am Main. © Thomas Wolf, www.foto-tw.de

With a cumulative balance sheet nearly as big as the GDP of the EU-27 (94% as of 2015), the failure of one of the 12 systemically important European banks would be a financial cataclysm that no European economy can afford. Should such an event occur, national authorities cannot but save their domestic economies, at any cost. But a bail-out at this scale would be a catastrophe for the entire EU and would rob another generation of EU citizens of any hope of support from an indebted and impoverished state. This systemic financial risk is admittedly at the root cause of the 2008 financial crisis and is referred to in a quick way as “Too Big To Fail“.

Since the European institutions gave up on the idea of splitting these mega-banks in the face of fierce lobbying from the banks concerned, the corresponding policy (Bank Structural Reform, BSR) has been officially withdrawn from the European Commission work program last October. EU's only hope of tackling the Too-Big-To-Fail problem remains the Bank Recovery and Resolution Directive (BRRD). This directive gives regulators new powers to ensure that banks can be resolved safely when they fail. Among these powers, the supervisory authorities could demand banks to make "structural changes" if that is needed to make them safely “resolvable”. In other words: the authorities could decide to force banks to split up their business pre-emptively, for prudential reasons.

So far, however, this tool has never been used. The ECB’s recent announcement asking Deutsche Bank to run a stress-test that would test the bank’s capacity to withstand the separation and resolution of its capital markets activities (which have been performing poorly for some time) has got some observers to suggest that regulators could be getting ready for a test run. But it is a long way, of course, between running a one-off stress-test on Deutsche Bank and actually imposing structural changes on G-SIBs.

Quite possibly, this step may be a “shot across the bows” of G-SIB management, just reminding them that regulators have this tool in their back pocket, even if they may be decidedly not keen to ever use it. Contrast that with the UK where the largest banks, are as we speak, finalising the separation of their retail and investment banking operations (because they were told some years ago, in no uncertain words, that they had to “ring fence” the systemically important parts of their business) and you may begin to see why it is more effective, sometimes, to have the courage for one big legislative “shove” instead of any number of small regulatory “nudges”.

Which brings us back to the beginning: The best, easiest and probably only way for the EU to reliably protect citizens from another series of massive bank bailouts is to go back to their first idea and implement bank structural reform.

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