ECB Opens Consultation on Harmonizing Application of EU Bank Law

  • Consultation on draft regulation will run until Dec. 16
  • Public hearing on draft scheduled for Dec. 11 in Frankfurt

The European Central Bank started a public consultation on proposed rules to standardize the application of European Union banking law in the currency bloc’s 19 member countries.

The ECB “today published the draft ECB Regulation on the exercise of options and discretions available in Union law and the draft ECB Guide on options and discretions available in Union law,” the Frankfurt-based institution said in a statement on Wednesday. “These documents lay down how the exercise of options and discretions in banking legislation is to be harmonized in the euro area. This is a major step toward creating a level playing field in the euro-area banking sector.”

Since becoming the supervisor a year ago for more than 120 banks across the region, the ECB has sought to create what it calls a “level playing field” for lenders, bringing together the patchwork of different traditions, interpretations and legal requirements. The supervisory board has agreed on a standard interpretation of EU law for 122 out of the more than 150 special national opt-outs.

Public Hearing

The consultation on the draft regulation, which will be a binding legal instrument, is scheduled to run until Dec. 16. Members of the public can submit comments on the draft via the ECB’s website. A hearing is scheduled to take place at the ECB’s premises in Frankfurt on Dec. 11. The central bank foresees the regulation being adopted around March 2016.

The process of harmonizing national practices will affect two areas in particular, the ECB said. Those are the treatment of banks’ holdings in insurance subsidiaries, and the phasing-in of deductions to capital on account of certain kinds of deferred tax assets, or DTAs.

For example, a six-year phase-in period for deduction of DTAs that rely on future profitability, instead of 10 years, would mean a capital charge next year of around 40 basis points for some Spanish and French banks, the ECB said. DTAs that have been converted into tax credits, such as those in use in Greece, Portugal and Italy as well as Spain, are not covered by the regulation.

Fragmentation Risk

“An inconsistent exercise of options and discretions across Single Supervisory Mechanism member countries, where not justified for example by national specificities, can contribute to fragmentation and risk in the banking sector,” the ECB said. “The regulation and the guide have been conceived with the overall objective to foster the harmonization of supervisory practices.”

The ECB said it gave special consideration to international standards and in particular to the work of the Basel Committee on Banking Supervision.

The phase-in rules of the Basel accord and their EU implementation were meant to moderate cliff effects that their immediate introduction would have created. Yet their practical relevance in the market is limited because analysts and investors are generally looking at “fully loaded” capital ratios, which are calculated according to the final set of rules. 

Most banks now emphasize either both ratios in their market communication, or focus on just the fully loaded numbers. The exceptions are lenders under special restructuring regimes, such as banks in Ireland, Spain, and those that are struggling to reach minimum ratios.

In some cases, the ECB has so far been unable to reach agreement on eradicating national divergences.

“Follow-up actions regarding 20 options and discretions as a final policy stance could not be formulated in full detail, or will not be fully operational until further developments, both internally and at European Banking Authority or Basel Committee level, are complete,” it said.

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