European Union banks will be forced to boost capital, disclose more information on their activities than ever before, and face tougher scrutiny of how they measure risks, after lawmakers formally endorsed a law to overhaul the bloc’s financial rulebook.
The European Parliament backed the sweeping changes, which also include a cap on banker bonuses at twice fixed pay, at a meeting in Strasbourg, France. The EU’s biggest banks had a combined 112.4 billion-euro ($147.3 billion) shortfall as of June 2012 in the reserves needed to meet the tougher capital standards, according to European Banking Authority data.
Parliament’s approval of the law, which is supposed to apply international agreements, is a “critical” step, Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail. The vote means it’s “put-up-or-shut-up time for the U.S.” which had “been able to delay action without endangering the global framework because it could point to the EU as a notable laggard,” she said.
The assembly’s vote follows 18 months of talks in which lawmakers insisted on expanding the scope of the legislation to include tougher banker pay rules, while governments baulked at provisions that would transfer some responsibility for setting capital requirements to the Brussels-based European Commission. The agreement will now be sent to ministers to be rubber-stamped.
Michel Barnier, the EU’s financial services chief, has said the legislation, which runs to more than 1,000 pages, is a cornerstone of the bloc’s response to the financial crisis unleashed in 2008, which forced EU nations to inject 1.7 trillion euros into their banking systems.
The new rules, which are scheduled to apply fully starting in 2019, more than triple the core capital that banks must hold compared to previous international standards. They will also force banks to maintain stocks of easy-to-sell assets that they could use to generate cash in a crisis, and hand powers to the London-based EBA to police the mathematical models lenders use to calculate their capital needs.
Other parts of the text will compel banks to publish country-by-country figures on the taxes they pay, profits they make and subsidies they receive.
The legislation was proposed by Barnier in 2011 to apply a regulatory overhaul, known as Basel III, that was drawn up by the Basel Committee on Banking Supervision.
While marking a milestone in the EU’s response to the financial crisis, today’s vote also opens a new chapter of tussles over how the bloc applies Basel rules, said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.
“Many technical aspects of the CRD IV proposals still remain to be worked out,” Reid said in an e-mail, in reference to the EU law. “My guess is that the passage of the CRD IV legislation only heralds a prolonged period of difficult and diverse implementation of complex regulatory rules.”
Barnier was pushed onto the defensive last year when the Basel committee warned of “material” inconsistencies between early drafts of the EU law and Basel III. The committee said the European text wasn’t strict enough in limiting which securities banks can count as capital, was too lenient in its treatment of bancassurers, and allowed banks too much scope to escape holding reserves against their stocks of sovereign debt.
The Basel group, which brings together regulators from 27 nations including the U.S., U.K. and China, has said that it will subject the final EU rules to a similar public review. The EU and the U.S. both missed an international Jan. 1, 2013, deadline to begin phasing in Basel III.
The U.K. has also criticized the EU text, because it considers the bonus rules as running counter to efforts to bolster banks’ resilience. The U.K. lacks the power to block the measures, which have already been endorsed by the 26 other EU governments.
Some key battles over the details of the legislation will now shift to the London-based EBA, which co-ordinates the work of national regulators in the EU and has some power to set technical standards.
EBA tasks in the law include assessing which assets banks should be allowed to count toward meeting the liquidity rule, potentially opening up another area of divergence with Basel, and defining which classes of employees should be hit by the bonus rules.