Out-Law News 2 min. read
15 May 2012, 3:02 pm
All 44 members of the European Parliament's Economic and Monetary Affairs Committee (ECON) voted in favour of the proposed new rules, which are intended to write the requirements of the international banking agreement known as Basel III into EU law. The plans, which would also limit bankers' bonuses to the amount of their fixed pay, must now be negotiated with EU member states.
Othmar Karas, rapporteur for the proposals, said that the outcome of the vote was a "very strong statement" in favour of stabilising banks by the Parliament, which it hoped would also finance growth to the "real economy" of small businesses who have struggled to obtain access to credit since the economic downturn.
"The new capital requirements are not only a pivotal piece of banking regulation, but a law to finance the real economy," he said. "The main challenge is to find the right balance. We must have the banks build more solid security buffers and finance the growth needed now in the real economy. Parliament wants to facilitate SMEs' access to finance with the new rules."
The international banking agreement known as Basel III will see more stringent capital requirements for banks phased in between 2013 and 2022. Banks will have to increase both the quantity and quality of capital they hold, while accounting for higher levels of risk-weighted assets.
The proposed European legislation calls on banks to hold enough capital to protect themselves against unexpected losses, with "systemically important" banks required to hold an additional capital buffer of 3%. Financial regulators in the EU's member states, together with a European Banking Authority (EBA) which would be granted more extensive supervisory powers, would be called upon to better supervise the capital requirements system, and would have the ability to increase the buffer to 10% if necessary.
The risk weighting assigned to loans to small and medium-sized enterprises would be reduced by 30% to "boost growth and job creation", ECON said, theoretically making it easier for those businesses to access finance. Similar incentives would also be extended towards loans made to start-ups.
However banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, was sceptical that reduced risk weighting would increase the amount made available to small businesses for lending by banks.
"Reduced risk weighting on loans to SMEs will still need to reflect the commercial reality of making such loans," he explained. "We have already seen many banks tighten their terms in this space. More pressure on internal credit committees is likely to occur from making such a change and it will be interesting to see how incentivised banks will be to increase lending to SMEs as a result."
ECON's text also calls for every financial institution to have "robust" governance agreements including consistent lines of responsibility, effective processes for identifying and managing risks and sound and fair remuneration policies. Bankers' pay should be consistent with effective risk management, reflect real-world performance and not encourage or reward excessive risk-taking. The Committee also calls for bonuses to be limited to the amount of bankers' fixed salaries.
"How consistent or uniform compliance and risk management systems within European banks can be remains to be seen given the size and variances of the markets within which these banks operate as well as the variances within the banks themselves," banking law expert Anderson commented. "More Government-supervised bank mergers are currently being proposed within Spain by way of example of such variances, which can complicate such a process."
Four Spanish savings banks are currently working on a merger supervised by the minister of economy that could create the country's fifth-largest lender, according to press reports. Last week the Spanish central bank announced that Spain's fourth-largest bank Bankia, itself formed from a merger of seven struggling banks in 2010, was to be part nationalised.
