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Basel III won’t cover the extra cap-ad rules for Sifis

Steve Tolley reports from Brussels on the European debate over systemically important financial institutions

The extra capital requirements for systemically important financial institutions, agreed globally last week, will not be included in the European Commission’s forthcoming proposals for the new Basel requirements.

The Basel committee on banking supervision agreed over the weekend that 30 Sifis globally will be required to hold between 1 and 2.5 per cent of capital on top of the 7 per cent set out for all banks last year.

The EC is expected to publish the capital requirements directive 4 in the next few weeks, which will set out the EU’s proposals for the implementation of Basel III.

European Commission Internal Market and Services spokeswoman Chantal Hughes says: “The extra capital requirements for Sifis will definitely not be part of CRD 4. The debate on Sifis is very important but it is being had within the Financial Stability Board and the G20. That will conclude around November, so timings will have to be sorted out later on.”

The new global Basel agreement will see banks ranked on size, interconnectedness, cross-border activity, complexity and the availability of competitors to pick up their business in a crisis.

The top eight banks will be required to carry 9.5 per cent core tier one capital with the rest needing to hold between 8 and 9 per cent.

The Bank of International Settlements, which sets the Basel rules, says both elements should be introduced together on January 1, 2019.

Hughes says: “How you define Sifis is a very complex area. We have expressed concerns in the past that it is too simple to just give some kind of closed list of a set number and then never adapt it.”

In May, after a draft of CRD4 was leaked, Internal Market and Services Commissioner Michel Barnier rejected reports the commission will water down Basel’s capital requirements allowing banks to count assets from their insurance subsidiaries towards them.

Barnier said the directive will meet “the balance and ambition” of Basel III.

Labour MEP for the South-east Peter Skinner says if insurance assets are allowed to be counted towards capital reserves, it could raise problems for the European supervisory authorities which operate on sectoral lines.

He says: “One has to ask the fundamental question – how will regulators dealing purely in insurance or banking deal with this if there is a concern over how a bank uses those insurance assets on the ground?”

Conservative MEP for London Syed Kamall says discretion to define what assets count as high quality capital and liquidity could be exploited by member states to benefit banks based within their borders.

He says: “That might be interpreted by some countries as a way to help their banks rather than actually deal with the issue we all want to deal with, that banks are properly capitalised.”

Conservative MEP for the East of England Vicky Ford says as the directive stands, it will not meet the spirit of what Basel sets out.

She says: “What was agreed at Basel is that firms need to start having minimum standards of acceptable capital and acceptable liquidity and they needed to be harmonised around the world. The commission draft is the other way around – maximum harmonisation of the level but too much flexibility for member states on what can count in the basket.”

The commission’s proposals are expected to be published by the parliament’s summer break which starts on July 22.

Hughes says the EC has no intention to undermine Basel.

She says: “Certain adaptations may be necessary to suit the economic zone we live in. For example, we apply Basel to all 8,000 banks in the EU, not just to the top-tier banks in the way the Americans do.

“However, at no point will those undermine the level of ambition or the overall balance that was set in Basel, we will fully respect that.”

Cicero Consulting senior country officer for Brussels Helena Walsh says: “The text is a little lighter than Basel III and many would hope that would remain the case but the commission is still firmly saying it is not set in stone.”

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