On November 23rd 2016 the Commission presented a proposal regarding the further reformation of EU banks in terms of strengthening their joint vitality.
The headlines of the proposition are of significant importance. The financial crisis shook banks and financial regulatory systems. In its devastating aftermath, banks and businesses try to regain stability and market confidence to benefit financial growth and employment opportunities.
The proposal builds on the current ongoing post-crisis, setting out guidelines how banks can pick up where they left off to support the financial economy again. The paper further elaborates on how the banking situation can be reformed by implementing elements that endure future financial pitfalls and / or shocks. The document also pin points aspects of the to-adapt regulatory framework, and in what terms the framework will affect a banks’ complexity, size or business profile.
The proposals include the following key elements:
1. Measurements to increase financial institutions’ stability and resilience
This includes the following elements:
- Particular risk-sensitive capital requirements around the market risk area, counterparty credit risk and for liability of central counterparties (CCPs);
- Procedures, techniques and approaches that expose risk quicker and more precisely so that banks can adapt to them accordingly;
- A methodology called a binding Leverage Ratio (LR) to prevent financial institutions from redundant leverage;
- A methodology called a binding Net Stable Funding Ratio (NSFR) to approach the excessive reliance on short-term wholesale funding and to minimise and/or reduce long-term funding risk;
- A precondition for Global Systemically Important Institutions (G-SIIs) to keep the merest amount of capital levels and other equipment that bear losses in resolution. The precondition, known as ‘Total Loss-Absorbing Capacity’ (TLAC), will be incorporated with the existing MREL (Minimum Requirement for own funds and Eligible Liabilities) system. TLAC advantage lies in the fact that it is appropriate to use for all banks – meaning that it will increase and restore the failing G-SIIs, while securing financial stability and minimising risks for taxpayers at the same time.
2. Tools that improve the lending capacity of banks to help support the European economic growth.
These tools would be applied to small businesses to minise potential disadvantages they could encounter throughout the reformative banking landscape:
- Diminish issues relating to the area of remuneration for non-complex and small financial institutions. Issues of this scope seem to be superfluous for these institutions;
- Increase bank’s capacities to lend to SMEs and enable them to fund future infrastructure ventures;
- Make sure CRD/CRR rules are more balanced and less troublesome for smaller financial businesses.
3. Assist in the progress of making the role of banks more apparent in achieving deeper and more liquid EU capital markets to support the establishment of a Capital Markets Union.
These adjustments are supposed to benefit banks in:
- Bypassing uneven capital requirements for trading book positions which also include positions related to market-making activities;
- Decreasing holding costs for instruments such as high quality securitisation or sovereign debt instruments;
- Preventing restraints in relation to trades cleared by CPPs for Institutions that act as intermediaries for clients.
The proposal and its suggested regulatory measurements have been submitted to the European Parliament and Council for consideration and possible adoption.
The original press release can be found here.