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France and Italy call for cap on EU banking reserve demands

France and Italy have called for a limit to the power of Eurozone regulators to increase minimum reserve levels for banks, the Financial Times has reported.02 Jun 2016

In a joint paper sent to other European member states and the European Commission last month, the French and Italian finance ministries ask for a cap on how far EU regulators can exceed international minimum rules on Total-Loss Absorbing Capacity (TLAC), the Financial Times reported.

TLAC is designed to allow the largest banks to fail without placing the rest of the financial system or public funds at risk of loss. It will apply to all banks designated as global systemically important banks (G-SIBs) by the Financial Stability Board (FSB), which coordinates financial policy for the G20 group of the world's largest economies.

By 2022, G-SIBs will be required to implement a TLAC cushion accounting for 18% of their risk-weighted assets (RWA), held in such a way that national regulators would be able to 'call in' those funds and wind up the bank in an orderly way in the event of failure. An initial 16% requirement will apply from 2019.

By 1 January 2019, minimum TLAC must also be at least 6% of its 'leverage ratio denominator' as identified under the Basel III international reform agreement, and 6.75% by the start of 2022.

Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk. It aims to strengthen bank resilience by increasing bank liquidity and decreasing bank leverage. The leverage ratio refers to the minimum level of capital banks have to hold as a proportion of their total assets without weighting for risk.

The FSB's TLAC principles say that national authorities can set a higher requirement, or add further buffers on top of the TLAC leverage ratio exposure (LRE) minimum. However, according to the Financial Times Italy and France said that any move to make European banks exceed the FSB's requirements should only be allowed in "exceptional" circumstances, and banks should never be asked to have an TLAC LRE minimum of more than 8%.

To do so would "result in additional funding costs for banks and could cause difficulty in a context where it is difficult to anticipate the depth of the market of European banks’ subordinated debt", the paper said, according to the newspaper report.

Plans set out by the US Federal Reserve suggest that US lenders will be subject to "very limited" extra requirements, potentially putting EU banks at a disadvantage, the paper reportedly said.