The European Union will seek to square its rules on handling failing banks with too-big-to-fail measures under development by global regulators, as the bloc’s banks warn that inconsistencies would harm their ability to compete.
Jonathan Hill, the EU’s financial-services chief, said that he would seek to prevent clashes between EU law and the Financial Stability Board’s proposal on “total loss-absorbing capacity” to avoid banks being burdened “unnecessarily.”
“There are issues we need to work through and reconcile, but I think we can do that,” Hill said in an April 25 interview in Riga, Latvia. “We understand the point that the industry is making and we want to try and get that right.”
The FSB, led by Bank of England Governor Mark Carney, proposed last year that the biggest banks be forced to have capital or subordinated debt equivalent to as much as a fifth of their assets weighted for risk. The goal of the rule is to ensure that losses when a bank fails can be pushed on to the bank’s creditors and investors, removing the pressure for a taxpayer bailout.
The TLAC rule would apply to the FSB’s list of global systemically important banks. The latest list is headed by HSBC Holdings Plc and JPMorgan Chase & Co.
The EU has already adopted legislation on handling bank failures, the Bank Recovery and Resolution Directive, which member states are in the process of implementing. It’s also finalizing rules on a so-called minimum requirement for eligible liabilities, the standard it’s seeking to align with TLAC.
“BRRD with MREL defines a minimum level of bail-in before you can have access” to an industry-financed rescue fund, Elke Koenig, head of the euro area’s Single Resolution Board, said in Brussels on Monday. “Then the resolution authority in consultation with the ECB arrives to define minimum requirements.”
TLAC and MREL can “work together, because TLAC, with all those requirements, can give you a very clear idea about what could be additional consideration for resolvability, and feasible resolvability for banks,” Koenig said.
Banks in many EU nations have warned that they could be placed at a competitive disadvantage by TLAC, arguing that it is cheaper for banks with holding companies -- a structure more common in the U.S. -- to issue debt eligible to meet the rule.
Lenders have also urged that the EU requirements on loss absorbency shouldn’t be set at a higher level than the global ones.
“Clearly we don’t want to burden banks unnecessarily if the end effect is the same,” Hill said. “And it’s the impact on the ground of the rules that matters most.”
“I think we’ve got time to get it right,” he said, in reference to a provisional 2019 start date for TLAC, and a scheduled 2016 review of parts of the EU measures.
Koenig said TLAC is necessary because it gives regulators clarity about “what amount of funds do you need to have available on Monday morning, undisputed, without getting to know all those lawyers you haven’t known beforehand, because they stall whatever you want to do.”