The EU Commission has postponed the date several times due to intensive lobbying activities from the member states and the banking industry. Now it seems to be more or less certain that Financial Market Commissioner Mairead McGuinness will present her proposals for the implementation of the new equity capital rules (Basel IV) agreed internationally in the Basel Committee at the end of 2017 in three weeks. The draft for the revision of the Capital Adequacy Ordinance and Directive (CRD / CRR) is still being voted on within the Commission. It is clear, however, that the Brussels authority does not want to give in to the lobbying of the banks on one central point. She intends to implement the Basel regulations for the use of internal bank models for calculating capital requirements essentially unchanged.Only recently, many European banking supervisors had sent an open letter to McGuinness to appeal to the Basel requirements to be consistently transposed into European law.

Werner Mussler

Business correspondent in Brussels.

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According to an examination by the EU banking supervisors in the European Central Bank, the use of these internal models often led to the banks underestimating their capital requirements.

The "Output Floor" agreed upon in the Basel Committee is intended to counteract this.

It stipulates that the capital requirement calculated using internal models is at least 72.5 percent of the capital requirement calculated using the standardized approach for credit risks.

This means that the equity requirement calculated using internal models may only be 27.5 percent lower than the standard approach.

This limits the ability of banks to downgrade their credit risks using internal models.

Cushion the consequences of the “output floor”

It is controversial by how much this lower limit increases the banks' capital requirements. At the end of 2020, the EU banking supervisory authority (EBA) calculated an additional requirement of around 50 billion euros; in a study by the think tank Copenhagen Economics commissioned by the European banking association, the figure is between 170 and 230 billion euros. The EU Commission wants to present its own figures.

The bank representatives, who refer to the promise of the EU finance ministers and the European Parliament that the implementation of Basel should not increase the capital requirements by more than 10 percent, had asked the Commission to cushion the consequences of the “output floor”.

The idea was to offset the bank-specific capital requirements provided for in the existing EU regulation with the Basel requirements in a so-called "parallel stack".

Germany and France had also asked for this in the summer.

Climate risks affect financial market stability

However, the Commission does not agree to this and envisages a “single stack” approach. According to EBA calculations, it will increase the capital requirement by 18.5 percent, while the Bundesbank comes up with a smaller increase. The EU authority wants to cushion the higher burdens on the institutes with long transition periods. There should also be relief for institutes that are primarily involved in SME financing. The Basel regulations stipulate a risk premium for loans to companies that are not subject to an external rating. This regulation would put many institutions in the EU, not least in Germany, in a mess because most medium-sized companies save themselves an external rating. A solution will be found that prevents a shortage of credit for small and medium-sized enterprises,it said in the commission.

It is still unclear to what extent “green” concerns will be included in the proposal.

Several Commission proposals on financial market regulation in recent months have been shaped by the idea that climate risks can also influence financial market stability.

McGuinness had indicated in July that such risks could also play a role in legislation for capital requirements.

However, the commission also states that these considerations have lost nothing in the implementation of the Basel regulations.

It is conceivable that the authority will propose certain capital relief for "sustainable" property and project financing.