ECB Says Impact of Proposed Banking Rules May Vary Across EU

The European Central Bank said it’s vital to evaluate the impact of planned new banking rules across the European Union as it may vary from one country to another.

“An impact assessment needs to be carried out as a matter of priority,” the ECB said in an e-mailed statement today. The proposals by an EU-mandated group led by Bank of Finland Governor Erkki Liikanen “may have a significantly different impact across the EU, given differences in the structure of the banking sectors.”

This could produce “different consequences in terms of divergent funding costs as well possible unintended consequences, namely on the real economy of member states,” the Frankfurt-based ECB said. “This needs to be assessed.”

Under the non-binding suggestions presented by the Liikanen group last year, EU banks would be forced to push many of their trading activities into separately capitalized units and face extra bonus rules. Lenders including Deutsche Bank AG and Credit Agricole SA have publicly lobbied against the proposals.

The group, assembled by Michel Barnier, the EU’s financial-services chief, also called for a toughening of Basel bank-capital rules and for lenders to issue debt designed to be written down in crises. Barnier said in an interview on Jan. 25 he will present proposals for a “strong reform” of bank structure later this year.

Further Clarification

“Further clarification” is needed on setting an additional capital-buffer requirement on trading activities, according to the ECB.

“The addition of a further capital buffer for European banks would need to be duly assessed as it would come on top of several other new requirements including the counter-cyclical capital buffer, the capital conservation buffer, the additional capital charge for systemically important financial institutions and, possibly, the systemic risk buffer,” the ECB said.

On bank structure rules, the ECB wants any EU measures to be coordinated with nations inside and outside the bloc to prevent “regulatory arbitrage.” Both the U.K. and the French governments have published plans to introduce some form of structural separation at their biggest banks.

Making Market

The ECB calls for officials to analyze further whether banks’ deposit-taking arms should be allowed to carry out so-called market-making activities. Market-making involves a bank offering to buy and sell the same security, so helping to set the market price.

While the Liikanen group’s proposals would push market-making outside the deposit-taking bank, France’s plans, published in December, would allow it to remain inside.

According to the ECB opinion, the EU should reject the Liikanen group’s proposals to force banks to issue a specific type of debt that would be written down or converted into equity should the lender encounter difficulties. Instead, the central bank favors European Commission proposals to give regulators broader “bail-in” powers to impose losses on banks’ creditors.

One approach could be to force systemically important banks to issue a minimum amount of debt that would be eligible for such writedowns, according to the ECB opinion. The central bank also “highly welcomes” proposals to toughen banker-pay rules.

Measures such as requiring a portion of a banker’s bonus to be given in the form of bonds that can be written down or converted into equity if the bank gets into difficulty should “be further assessed and pursued,” the ECB said.

Before it's here, it's on the Bloomberg Terminal.