Good luck harmonising European bank capital!
Following up on my post of some days ago on Europe’s efforts to harmonise bank capital, it dawned upon me that this harmonisation plan will probably not go well.
Today, Danièle Nouy confirmed there will be a consultation on ECB’s efforts to harmonise Options and National Discretions (ONDs) in the CRR.
Consultation, consultation, consultation.
Mind you, this if the n-th consultation on EU bank capital.
The first consultations on post-GFC bank capital rules were in 2009 and in 2010. Whatever happened with consultations one and two is unclear. The EC drafted CRDIV/CRR basically on its own. It published a first version in the summer 2011. It took two full years to agree on the final directive and regulation, which entered into force in 2014.
The Danish Compromise: protecting banks that hold shares in insurance companies.
One reason why it took so long to agree on the final texts was CRR Article 49, which exempts banks from deducting holdings in insurance companies. This exemption is a significant departure from the Basel III rules text. Obviously, the Basel Committee took notice and used the exemption to support a materially non-compliant verdict on Europe’s implementation of Basel III, thus provoking a fuming response from Michel Barnier.
At some point in 2011, the EC realized that the rule that exempts banks from deducting insurance holdings would make it look bad. The Commission feared that the world would view Europe as not being sufficiently tough on banks.
Here is where a third consultation comes into play: In 2011 the Joint Committee of European supervisory authorities (EBA, EIOPA, ESMA) launched an initiative to toughen the capital standards for banks through a back-door: via the capital rules for Financial Conglomerates (Ficod). The Joint Committee wrote a standard that would strengthen the capital requirements for Financial Conglomerates significantly, thus forcing banks that owned insurance companies to hold more capital. This standard was consulted in 2012, and I wrote about it a couple of times.
Although relevant Article 9 of the standard appears to have “bite”, I never heard anyone complaining about it. In light of today’s discussion on harmonising bank capital rules, it has probably become unenforceable or irrelevant.
Consultation number 4
Barely eighteen months after the entry into force of the CRR, the EC released a consultation on the effects of CRD IV on bank lending. The consultation invites respondents to offer suggestions for improvement. This is laudable, however, with the ECB executing its own harmonisation project, one wonders what will happen with this consultation. I dutifully submitted my answers two weeks ago, so it is early days to speculate on the outcomes.
Déjà vu all over again?
The ECB will now consult, again. However, things are not looking good. It is not only about the rift between the EBA and the ECB on whose prerogative it is to change the CRR – on which I wrote earlier.
More importantly is that it is Déjà vu all over again, as Danièle Nouy confirmed yesterday: “Regarding the so-called Danish compromise… we were very split, almost 50/50, but one camp was a little bit more than 50, the camp that wanted to keep it, so for the time being it’s still there” she said.
Here you have it: with softening attitudes toward banks, and banks meeting Basel III capital requirements years ahead of schedule, why would the ECB succeed where EBA, EIOPA, ESMA, EC, and the European Parliament failed only two years ago?