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Banking Updated: 01 Dec 2016

The EC unveils new regulatory package to improve European banking regulation

Last week, the European Commission announced a new package of regulatory measures: An in-depth regulatory overhaul at all levels -  capital, capital adequacy, leverage ratio and loss-absorbing capacity -  aimed at “completing the post-crisis regulatory agenda by making sure that the regulatory framework addresses any outstanding challenges to financial stability, while ensuring that banks can continue to support the real economy.”

Regulation

The review includes the implementation of several international standards into the EU law and the introduction of a package of technical improvements. In parallel, a legislative proposal to harmonies creditor hierarchy of senior debt across the EU has also been released. The final text of the new package unveiled by the European Commission still needs to be agreed by the European Council and the European Parliament, a process that is expected to last approximately year.

The European Commission’s reform package is expected to spark a debate at the heart of the European Union, judging by reports appearing in some media outlets. According to Britain’s FT, Germany and France are set to collide over these changes. Germany, on the one hand, fears that proposals may not be tough enough to protect taxpayers in future crises. On the other, senior German officials have expressed their concern about the fact that some aspects of the reforms could overly constrain bank supervisors.  Germany aims to preserve the freedom for supervisors to demand buffers that go beyond agreed international minimum standards. However, other publications, such as Reuters, cite German official sources saying that the new regulation proposals go “in the right direction.”

The new measures

- Capital Requirements Regulation (CRR):

1. Leverage ratio

2. Net stable funding ratio

3. Fundamental Review of the Trading Book

4. Counterparty credit risk exposure

5. Exposures to central counterparties

6. Equity investment in funds

7. Large exposure framework

8. Disclosure requirements

9. Other technical improvements of CRR

- Capital directive requirements (CRD)

10. Interest rate risk in the baking book

11. Financial and mixed financial holdings

12. Remuneration

13. Pillar 2

- Resolution framework

14. TLAC Implementation in Europe and MREL review.

According to BBVA Research, The implementation of international standards in Europe in the prudential and the resolution frameworks as well as technical improvements are positive. “After three years of application of the current prudential framework, we are in a good position to identify issues that are not working as expected,” says the BBVA study service. “Adjustments made to reflect European specificities are welcome.  Nevertheless, it is also necessary to take into account the specificities of the markets in which European banking groups operate in order not to unduly penalize banking groups with a global footprint.”

BBVA Research also points out that the Clarification of the new Pillar 2 framework is very positive. It is necessary for markets and institutions to provide certainty to the regulatory framework,” notes the report. Nevertheless, the study service notes that the breach of the MREL requirement should not trigger the activation of the MDA (Maximum Distributable Amount), as this requirement responds to a different nature than the prudential requirements.

It also underscores that the regulatory overhaul is still running. With the new legislative package fresh out of the oven, the industry and the markets already have an eye on the finalization of the Basel III framework, which will be discuss in Chile next week, and its future implementation in Europe.

This legislative proposal already includes some of the standards that have been discussed under the review of the Basel III framework, such as the new framework for interest rate risk, the new approach for counterparty credit risk and the review of the trading book. The rest of the elements will be debated in Basel IV at a subsequent stage.