The EU is on its way to fulfil its international commitments and to introduce the Basel III rules for capital requirements but the question is when. This emerged from today's (March 5th) discussion in the EU finance ministers council on the compromise reached between the Council and the European Parliament on the Commission's package for a directive and a regulation for the capital requirements. In 2010 has been agreed the third international agreement on capital requirements Basel III even before the previous one to have been implemented by all global players. But the global financial crisis of 2009 and the economic one that followed forced the G20 countries to commit to introduce the new rules as of January 1st 2013. This deadline, however, has been postponed with a year and from the deliberations on March 5th in the Ecofin council in Brussels it becomes clear that January 1st 2014 is not a very certain deadline either.
What do the Basel III rules and the EU compromise envisage?
Three years ago, in Basel, has been agreed the minimum required common equity capital to increase from 2 to 4.5% as, separately, the banks will be obliged to maintain a capital buffer of 2.5% to be able to sustain stress situations. In this way, the common required capital rises to 7%. The introduction of the new rules should start on January 1st 2013 and to continue to 2015 for the common capital and to 2019 for the buffers.
On the 20th of July 2011, the Commission came up with a proposal to amend the capital requirements directive. With it the Commission aims to introduce in Europe the international standards for bank capital Basel III. The rules will cover 8300 banks in the EU which represent 53% of global assets and finance 75% of the economy, as explained in March 5th EU Internal Market Commissioner Michel Barnier. The Commission will also provide additional powers to the supervisory bodies for closer surveillance of banks and will empower them to undertake restrictive actions in cases of risk such as, for instance, credit expansion which shook not a few economies in the EU. The Commission proposes a package - a regulation and a directive - with the aim to unite the entire relevant legislation on the issue, thus creating a single rule book for bank regulation.
The regulation will require banks and investment firms to hold common equity tier 1 capital of 4.5% of the risk weighted assets. The required common capital, including tier 1 and 2, remains unchanged - 8%. The European Banking Authority will monitor the quality of instruments the financial institutions use. Also introduced is a requirement the institutions to hold liquid assets the total value of which should cover the net liquid outflows for 30 days. In times of stress, the institutions will be able to use their liquid assets to cover net outflows. The liquidity coverage ratio will be introduced gradually and will start with 60% in 2015 until it reaches 100% by 2018. In 2016, the Commission will make a review and will assess whether to postpone the introduction of the 100% if that is justified by the international environment. Until the full introduction of the ratio, the member states will be able to keep or introduce requirements of their own.
Non-compliance with the EU requirements will lead to sanctions by the supervisory bodies. Those sanctions can be 10% of the annual turnover of a financial institution or a ban on members of the management body. Restrictions on bankers' bonuses are also introduced which was one of the most discussed issues related to the financial crisis because, in spite of the failure of systemic banks, some of them were rescued with taxpayers' money, while bankers responsible for taking excessive risk continued to receive huge bonuses. A practise which continued even after the crash of the financial system in 2009 and led to tensions between taxpayers and financial institutions.
According to the compromise, the bonuses will be bound to fixed wages with 1:1 ratio. This means that the bankers will not be able to receive bonuses bigger than their salaries. Exceptions will be allowed (maximum 2:1) if a quorum of shareholders who represent 50% of the shares vote for that and if a 66% majority approves the measure. If a quorum cannot be reached, then the measure can be approved by 75% of the present shareholders. British Secretary of the Exchequer George Osborne expressed Britain's reserves against this, saying that the proposals in that direction could undermine the responsibility of the banking system instead of encouraging it.
According to him, the capping could lead to rise of salaries, to make harder the return of bankers' bonuses in times of a crisis and will in general make it harder for banks and bankers to pay for their mistakes instead of taxpayers. He did not get a significant support in the Council, but given the consent for additional technical consultations, it is not impossible Britain to get some concessions. The Netherlands said that it intends to introduce even stricter caps on bonuses than those envisaged in the package, while Commissioner Barnier recalled that in many countries citizens suffer great hardship because of the rescue of the banking sector.
In the end of the road
According to Barnier, the agreement has reached the end of a very long way. The negotiations between Parliament and Council began in May last year. He called the legislative package for the capital requirements to enter into force on January 1st 2014. During his recent visit in Washington Mr Barnier was assured that the US is ready to apply its rules from January next year. But the issue divided the ministers because, according to some of them, the time for parliamentary procedures for the introduction of the package (or the directive only, as the regulation does not need to be transposed) is not sufficient.
The European Central Bank also expects the negotiations and the approval of the package to finish quickly because it is very important the bank to have at its disposal the micro- and macro-prudential powers in the package. The Netherlands said that given its own parliamentary procedure, it will need at least 12 months for this. Slovenia called for a "realistic" deadline for transposition of the package, while Malta proposed "flexibility" which is an euphemism for single implementation. Luxembourg, too, will need 12 months, as became clear from the discussion. France, however, called the enforcement of the package to be bound to the single supervisory mechanism for the banks whose entering into force is scheduled for March 2014. Bulgaria, too, has concerns related to the transposition of the directive, but it also does not feel comfortably with the buffers, the country's permanent representative Dimitar Tsanchev said, although he did not table any specific numbers.
Commissioner Barnier said in the end of the otherwise very concise discussion that he understood the concerns of some member states, but recalled that the date 1st of January 2014 was related to international commitments. He said, however, that he was pragmatic on the issue without elaborating what that meant. According to him, it is important for the ECB, too, to have at its disposal the provisions from Basel and to have a single rule book. Summarising, Irish Finance Minister, who chaired the Council, Michael Noonan, said that a broad majority was reached on the legislative package, but that technical negotiations were to take place. The permanent representatives committee has received a mandate to conclude the negotiations with the parliament on the remaining technical issues in the second half of March. According to Danish Minister of Finance Margrethe Vestager, today is a good day for Europe to stabilise its financial system. It seems so.