EU’s bank-rule overhaul sets stage for tighter financial ties

Bloomberg

European Union finance ministers gave the green light to an overhaul of the bloc’s banking laws, paving the way for long-planned steps towards closer integration of the euro area’s financial system.
The update, first proposed in late 2016, incorporates capital and liquidity standards set by the Basel Committee on Banking Supervision. It also sets new requirements for loss-absorbing liabilities that banks must have so they can recapitalise themselves quickly after restructuring, averting a public bailout.
French Finance Minister Bruno Le Maire said the decision reached in Brussels creates the “political momentum” needed to push ahead with a plan to deepen ties in the currency bloc. Le Maire said that he and his German counterpart, Olaf Scholz, are committed to delivering on “all aspects” of the integration plan, starting next month with a backstop for the euro area’s rescue fund for failing banks.
“Anyone who is waiting for the next step can be absolutely sure that it will take place,” Scholz told reporters after the meeting. “We think that we should be successful before summer. This is not a long time.”

DEPOSIT INSURANCE
The EU’s banking-union project, which dates back to 2012, is an attempt to integrate financial markets in the bloc and avert future crises. It consists of the EU rule book, centralised supervision by the European Central Bank and a bank-failure authority, the Single Resolution Board.
A planned common deposit insurance system remains on paper.
Finance ministers broke a months-long deadlock between Germany and France over changes to the loss-absorbency requirements in EU bank-failure rules.
Under the plan, the largest banks must have subordinated liabilities equivalent to 8 percent of their total liabilities and own funds. That’s important, because it’s also the level of losses that must be imposed on investors in the resolution of a bank — a procedure known as bail-in — before access can be gained to rescue funds.
“The banking union needs to protect taxpayers as well as possible,” Scholz said.
That means firms need enough subordinated debt to meet the 8 percent threshold so the bail-in tool can work effectively, he said.
Resolution authorities would have discretion to set a higher requirement based on the riskiness of the bank and any impediments to its orderly resolution. The requirement could also be set below 8 percent if no “material risk” of a successful legal challenge by creditors is found.
The compromise extends the toughest requirement to all lenders with a consolidated balance sheet of more than 100 billion euros ($117 billion). This threshold “would be at the top of the range previously proposed, and could make it more difficult to apply bail-in to mid-sized banks under the EU’s bail-in framework,” according to Fitch Ratings.
Banks will have until 2024 to meet the full requirements, under the ministers’ plan. The ministers also endorsed new rules on the classification of banks as global systemically important institutions, a tag that brings higher capital requirements. Changes including a discount for banks’ cross-border activities within the euro area could lead to lower capital charges for lenders such as BNP Paribas SA and UniCredit SpA.