Luis de Guindos: EU banking package
Contribution by Mr Luis de Guindos, Vice-President of the European Central Bank, at
the Seminar on the Capital Requirements Regulation and Directive (CRR/CRD),
Madrid, 9 June 2023.
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CRR3/CRD6 - key last step to fully leverage on the lessons learned
from the global financial crisis
It is a great pleasure to take part in this seminar about the outstanding Basel III reforms
in Europe.
These rules have been developed and agreed upon at international level by central
banks and bank supervisors, in response to the lessons from the global financial crisis.
One important lesson has been that banks tend to downplay their risks using internal
models. The core of the 2017 reforms - the output floor - ensures that a limit is
established on how much banks can tweak their risk profile using their internal models.
This is an essential achievement.
I will focus my remarks today on the fact that we need to protect this achievement, and
we need to continue drawing lessons for our EU banking framework, including from the
recent episode of bank stress.
Benefits of strong regulation and supervision
The recent episode of stress in the US and Swiss banking sectors reminded us of the
importance of strong regulation and strong supervision. It was a wake-up call
highlighting the merit of sticking to the agreed standards. There are many lessons that
can be drawn from this episode. Let me focus on three in relation to finalising our
banking framework, the CRR3 and CRD6.
First, we have seen that a strong regulatory framework eventually pays off. Euro area
banks have been remarkably resilient in response to the pandemic, the Russian war
and the recent episode of bank stress. Significant banks' common equity tier one capital
ratio stands at 15.3% on average, with liquidity well above regulatory minima. We have
also seen improvements in the diversification of funding sources and bank profitability.
At the same time, resilience of the euro area banking to the latest episode of stress
should not lead to complacency.
Second, we have seen that weakening the regulatory framework can create systemic
risks. Pockets of vulnerability can emerge easily, particularly where standards are not
applied fully. And these vulnerabilities can quickly grow into broader financial stability
risks. In this context, let me comment on the Liquidity Coverage Ratio, the LCR. Some
attention has been paid to this element of the Basel framework and whether meeting
the LCR would have helped the stressed banks. The LCR should not be considered a
tool in isolation to measure and address liquidity and funding risks. To the contrary, the
turbulence this spring shows that the Basel framework - which has regulatory and
supervisory pillars - needs to be seen and be implemented, in its entirety. For example,
in the ECB, the check of regulatory measures such as the LCR is complemented by
additional supervisory liquidity risk monitoring.
A third and important lesson from the recent episode is that trust issues can develop
and spread more quickly in the digital age. Bank runs can happen faster than in the
past. This makes it even more important to have bank managers' commitment to sound
bank business models, because they are a precondition for trust. Bank management
matters in establishing trust in business models. We need a tough rulebook which
allows supervisors to check and react to bank management-related issues.
Priorities for the Banking Package
Coming to the topic of today, what should we focus on for finalising the EU banking
package? Two key priorities emerge from the above learnings.
First, only strong rules will lead to strong banks. I am particularly concerned about those
areas where the legislation proposals for the capital requirements regulation (CRR3)
would deviate from Basel III - especially on the risk-weights for loans to unrated
corporates. These deviations lower the impact of the output floor on banks' required
capital. In fact, on average, all proposed deviations together would more than halve the
effect of the introduction of the output floor on banks' required regulatory capital, and
even lower the required regulatory capital for some banks compared to the status quo.
It is of particular concern that in some of the proposals these deviations are even
suggested to be made permanent. Watering down the safeguards provided by agreed
global standards now would send a detrimental message not only on the future
resilience of EU banks, but also regarding the EU's commitment to international
agreements.
A similarly concerning issue is the intention by some trilogue parties to reintroduce
prudential filters on the accounting of unrealised losses on government bonds. These
have been in place in the EU until the end of 2022 on account of a systemic exemption
during the pandemic crisis. They need to be strictly limited to exceptional crises times
and now is not the time to reintroduce them.
As a second priority, I call on you to empower and trust prudential authorities. Only
strong supervisors can implement strong supervision and exercise the required
scrutiny. Here I am concerned about the reluctance to grant the ECB a stronger and
more adequate role as a gatekeeper in ensuring that only suitable and experienced
managers can take up top positions at banks, especially at large ones. Ensuring that
managers are "fit and proper" for their job is key for sound and robust governance. The
recent episode of bank stress has shown that culture matters and that banks need to be
properly managed, as otherwise trust erodes.
In addition, I am concerned that all proposals still impose freezes on the
macroprudential buffers of a bank when the output floor becomes binding. This is
allegedly to avoid double-counting of risks. But here again, legislators should trust the
macroprudential authorities to ensure that both buffers are calibrated appropriately.
Macroprudential buffers cater for system- or sector-wide risk, while the output floor
caters for bank-specific risk.
On a positive note, we welcome the inclusion of environmental, social and governance
risks more explicitly in banking regulation, as this will grant supervisors more adequate
tools to require banks to address these risks more effectively. We also welcome the
new rules on third-country branches, which aim to avoid unregulated and unsupervised
activities that could pose risks to financial stability in the EU.
Conclusion
Let me conclude. Finalising Basel III in EU legislation is crucial to keep our banks safe
in an ever-changing macro-financial environment. We should do so faithfully, without
deviations, to underpin our commitment to a resilient banking sector in Europe. I
strongly welcome the intention of the Swedish and Spanish Presidencies to finalise
CRR3 and CRD6 still this year, to ensure an entry into force on 1 January 2025.
Targeting this date will also keep the EU aligned with the plans in other major global
jurisdictions, so that we cross the finishing line together after this over ten-year
endeavour to strengthen the global banking system. Only by upholding strong
regulation and powerful supervision, will we ensure strong and stable banks in the EU.