Saudi Press

Saudi Arabia and the world
Thursday, Mar 28, 2024

EU can’t go it alone on global banking agreement, top regulator warns

EU can’t go it alone on global banking agreement, top regulator warns

Banks risk becoming ‘less resilient’ if they get too many carve-outs from Basel III reforms, says Neil Esho.

The EU will only hurt itself and weaken its banks by departing from a global agreement on capital reserves struck after the last financial crisis, according to a top international regulator.

Neil Esho, secretary general of the Basel Committee on Banking Supervision, is warning that European banks will be less resilient to shocks if the EU tries to soften the capital hike by creating deviations from the final so-called Basel III reforms. These reforms mark the last set of measures following the 2008 financial crisis that are intended to shore up the banking sector and force lenders to hold better-quality and higher reserves to swallow losses.

"Many of [the deviations being discussed] go in the way of making the system weaker," he told POLITICO in a recent interview. "So you're ending up with a banking system that is less resilient. And when shocks occur, there's less capacity to absorb those shocks and to continue lending."

Such moves would also make the European banking system more dependent on governments and central banks for support at a time when they may not have the firepower to weather a crisis, cautioned the Australian, whose panel sets worldwide standards for bank capital and is a global forum for central bankers and supervisors.

"That support is less and less likely, given what's happened after COVID, what's happened after the war in Ukraine, the big increase in debt," Esho said.

"I don't think governments have the capacity to step in so much. Monetary policy is tightening. So, in this environment, you want your banking sector to be as resilient as possible," he added.

His comments come as the EU debates how to bring in the final Basel III reforms across the bloc. Key questions include whether to create temporary carve-outs for low-risk mortgages and loans to companies without a credit rating to limit an otherwise sizeable capital blow for lenders.

EU capitals and lawmakers are still debating if those transitional regimes should stay in place or even be made permanent fixtures of the EU’s regime.

A number of other revisions are also on the table in both EU capitals and the European Parliament — for instance, lowering the capital charges for securitizations or long-term shareholdings foreseen under the international agreement.

The banking industry, backed by countries like France and Denmark, has been lobbying for extra flexibility for EU banks — warning that a large capital hike could dent the economy. A compromise deal that includes the transitional regimes has gained broad support among EU capitals.

Meanwhile, in Parliament, the lawmaker leading work on the legislation is taking a stricter approach and wants to bring the reforms in faithfully. But he faces pushback from other MEPs — with the split seemingly more along national lines than between political groups.


'Death by 1,000 cuts'


Esho, who took the helm of the Basel Committee in February, said he had not heard "any good reasons" to make changes to the international agreement. He would be "concerned" if the transitional regimes become permanent as they could be “quite material” deviations, he added.

A central flashpoint is the output floor, which refers to the limits on banks’ use of internal models to lower their capital charges. Basel III seeks to standardize how banks measure risks on their balance sheets. Banks are pushing for some carve-outs, but too many exceptions will creates a slippery slope, he warned.

"It becomes like death by 1,000 cuts," he said. "You start nipping away at it, and then all of a sudden, you start making all these other changes, and the whole thing becomes ineffective."

As Esho sees it, the EU’s efforts to limit the hit from the output floor won’t be copied by other jurisdictions, leaving the bloc as an outlier.

“The jurisdictions that deviate, they'll be the ones to stand out,” he said.

Esho also questioned the logic of considering the transitional regimes to be “European specificities” that take account of the unique characteristics of the EU market. Many small businesses worldwide don't have credit ratings, he pointed out.

These firms are "an important part of employment in economies," he said. "But they're also relatively risky. So, for banks lending to small- and medium-sized enterprises, they need to be well-capitalized. And that applies everywhere. Most SMEs are not rated. I don't think it's a European-specific issue."
Climate charges

The Basel Committee is also taking a cautious approach on how to incorporate climate change into its framework.

Some EU lawmakers have suggested hitting banks with one-for-one capital charges for any new lending for fossil fuel exploration or extraction in amendments to the Basel legislation. (That highest-possible capital requirement is on the table at the Basel Committee for risky crypto holdings.)

But Esho indicated there won't be any imminent steps without more certainty on how global warming will translate into losses on banks’ books. Otherwise, there's a risk of "diverting capital in the wrong direction," he said.

“If you're going to come up with a capital regulation, you need a degree of certainty as to how this risk would materialize in terms of losses for a financial institution, which would then drive capital charges,” he said. “That’s still very much a work in progress for us.”

Instead, he pointed to supervision and stress-testing — where the committee has already made recommendations — as one way to get a clearer picture of how climate change may lead to losses on banks' books.

Yet Esho acknowledged the committee can't hold off for years as the effects of climate change become more visible, notably with a summer of droughts and record temperatures in Europe.

"We don't have years and years to sit on this and wait for a perfect estimate," he admitted. "But at the same time, you want to be reasonably confident that what you're putting in place is moving in the right direction."

Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Reports in Gaza: 5 dead from the impact of aid packages dropped by the USA
Apple warns against drying iPhones with rice
China Criticizes US for Vetoing UN Ceasefire Resolution in Gaza
In a recent High Court hearing, the U.S. argued that Julian Assange endangered lives by releasing classified information.
The U.S. vetoed a U.N. Security Council resolution calling for a temporary ceasefire in Gaza, instead proposing its own six-week ceasefire plan contingent upon the release of all hostages held by Hamas
Prince William Urges End to Gaza Conflict
Saudi Arabia ranks first in UN index for e-government services in MENA
Israel has gone ‘beyond self-defence’ in Gaza, says Labour’s Streeting
EU Calls for Immediate Ceasefire in Gaza Conflict
Israel Records 20% Drop In GDP, War In Gaza Is The Reason
Saudi Arabia's FDI Inflows Grow with New International Standards
Venture Capitals Power Up Across MENA Region
Saudi Arabia Introduces Terms for 30-Year Income Tax Exemption for Multinational Companies
Saudi FM: Establishing Palestinian state is only pathway for Mideast stability
Russian opposition leader Alexey Navalny has died at the Arctic prison colony
Elon Musk's Starlink Gets License For Israel, Parts Of Gaza
Influencers Exploit X Platform for Profit Amidst Israel-Gaza Conflict
PM Modi Announces Opening Of New CBSE Office In Dubai
International Criminal Court's Chief "Deeply Concerned" By Rafah Bombing
January Funding for MENA Startups Totals $86.5 Million
Saudi Arabia accelerates digital economy growth through Nvidia partnership
Indian female military officers commend Saudi Arabia's progress and women's empowerment
Israel unveils tunnels underneath Gaza City headquarters of UN agency for Palestinian refugees
Israel deploys new military AI in Gaza war
Egypt threatens to suspend key peace treaty if Israel pushes into Gaza border town, officials say
Israel Utilizes AI Military Technology in Gaza Conflict
Saudi Arabia Warns Of A "Humanitarian Catastrophe" If Israel Moves On Rafah
China Warns Iran to Halt Houthi Attacks or Damage Trade Ties
US University To Shut Qatar Campus Due To "Heightened Mideast Instability"
Iran-backed hackers interrupt UAE TV streaming services with deepfake news
Facebook and Instagram Ban Iran's Supreme Leader
Finnish Airline, Finnair, is voluntarily weighing passengers to better estimate flight cargo weight
U.S. Secretary of State Blinken: The Israelis underwent dehumanization on 7.10, this does not give them the right to do this to others.
Defense Technology Showcase Held in Riyadh
Saudi Arabia’s non-oil exports rise 2.5% to $6bn in November 2023: GASTAT
UK Bans Misleading "Zero Emissions" Claims for Electric Cars
Gaza's Teen Inventor Sparks Light in Displacement
Netanyahu Rejects Ceasefire Proposal, Insists On Total Victory Over Hamas
Guterres appoints independent UNRWA review panel
Private Sector Employment Hits Record High with Over 11 Million Employees in January
Rolls-Royce Executive Encourages Saudi Women to Tap into Their Inner 'Superhero' for Success in Defense Industry
Saudi Arabia launches National Academy of Vehicles and Cars
Saudi Tourism Minister Reveals Plan for 250,000 New Hotel Rooms by 2030
SAR to more than double eastern network passenger capacity with new trains deal
Saudi Arabia Enhances National Defense with New Partnerships
Saudi Aramco Maintains Arab Light Crude Pricing to Asia for March
NEOM Establishes New York Office to Support Investors
Saudi Wealth Fund Draws in Over $25 Billion Worth of Investments in Three Years, Al-Rumayyan Reveals
ZATCA Cautions Against Scammer Schemes
INTRA Defense Technologies inaugurates drone factory in Riyadh
×