[LONDON] Global banking regulators need to make sweeping changes to proposed new rules to protect European Union lenders against a spike in capital requirements, said Valdis Dombrovskis, the bloc's financial-services chief.
The Basel Committee on Banking Supervision should rework planned restrictions on how banks use internal models to estimate risks from real-estate loans as well as corporate and infrastructure lending, Mr Dombrovskis, a vice president of the European Commission, said in Brussels on Thursday. Banks have warned that the proposals on how they assess credit, operational and market risk would lead to hundreds of billions of dollars in additional capital charges.
The planned introduction of capital floors, which cap the benefit banks gain by using their own models compared with a formula set by regulators, should be scrapped, Mr Dombrovskis said. The position of the commission, the EU's executive arm, puts it at odds with the US, which has said regulators should consider discarding the internal-model approach altogether because it creates the potential for banks to game the rules.
"A solution we could not support is one which would weigh unduly on the financing of the broader economy in Europe," Mr Dombrovskis said, according to the text of a speech distributed by his office. "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."
The proposals have become a flash point between regulators from Tokyo to Washington about how to put the final touches on changes to the post-2008 crisis rule-book. The Basel Committee is racing to complete the capital framework known as Basel III by the end of the year and it's under instructions from political leaders not to increase overall capital requirements significantly in the process.
That promise, first made in January, left open the possibility that individual countries or banks could face a marked increase. European banks including HSBC Holdings Plc, Deutsche Bank AG, Societe General SA and Credit Agricole SA have led the global lobbying campaign against the proposals, writing letters to regulators, giving speeches and warning about the impact of the rules on earnings calls all year. The industry argues the proposals overreach and amount to a new wave of regulation dubbed Basel IV.
The European Commission has observer status on the Basel Committee, whose members include the US Federal Reserve, the European Central Bank and Japan's Financial Services Agency.
Mr Dombrovskis said that the current proposals "would imply significant capital requirement increases in all areas" and threaten to put EU banks "at a disadvantage compared to our global competitors." He also called for "further consideration" of a proposal that restricts banks internal models for operational risks, such as fraud and cyber crime. His positions echoed those voiced by an EU official earlier this month.
In his speech, Mr Dombrovskis said the regulations must account for differences between European and other markets. Large European banks may be more vulnerable than their global peers to the changes because bank loans to companies are overall much more prevalent in Europe than in the US, where bonds dominate corporate borrowing. European banks also keep mortgages on their books, while US lenders offload them to Fannie Mae and Freddie Mac.
"Basel revisions should recognize that in a number of areas, markets in Europe face different challenges than elsewhere," Mr Dombrovskis said. "It is perfectly normal for a bank focused on lending in a sector and region with low risks to have lower average risk weights than a bank operating elsewhere. We believe it is important to keep it that way."
Mr Dombrovskis said the commission is continuing a review of industry comments about regulations already put in place and intends to ensure that EU rules are "as growth friendly as possible."
"We'll set out our way forward on this in much more detail by the end of the year," Mr Dombrovskis said. "The main thrust of it is already clear. We need to consider adjustments to increase funding to the wider economy."