ECB split over report showing big EU banks’ capital requirements lower than US rivals

The European Central Bank (ECB) is debating whether to publish sensitive research showing capital requirements for big EU lenders would rise by a double-digit percentage if they had the same rules as large Wall Street rivals.
Some senior policymakers at the ECB are pushing for it to publish the report, or at least some of its findings, to counter heavy lobbying by the banking sector to water down rules implementing the Basle agreement on global capital requirements in the sector.
The pressure from EU banks is likely to increase if the US dilutes or even abandons plans to impose the Basle rules on its banks amid an expected wave of deregulation following Donald Trump’s victory in this month’s presidential election.
The so-called Basle III package is an ambitious overhaul of bank regulation agreed by supervisors around the world in the wake of the 2008 financial crisis to limit how much lenders can use their own models to make their balance sheets appear stronger than they would otherwise be.
The ECB report, which was completed last year but has never been published, examined what would happen to EU bank capital requirements if they were subjected to current US prudential rules.
Officials in Frankfurt found that for the biggest EU banks, the application of US rules would increase their minimum capital levels by a double-digit percentage, according to two people briefed on the report.
The biggest lenders in the EU and the US have to meet extra capital requirements based on their systemic importance, and the impact their collapse would potentially have for global finance.
The minimum capital levels for the biggest US banks include a buffer reflecting the Federal Reserve’s annual stress test results and a further surcharge based on their systemic importance, on top of the basic “pillar one” requirements of 4.5 per cent of a lender’s assets, weighted for risk.
Some officials are reluctant to publish the ECB’s findings because they stem from several assumptions that are likely to be challenged by the banking industry. Officials believe those challenges could create counterproductive disputes between the lenders and the central bank’s supervisors.
Others say the report is partly based on confidential data, making publication difficult.
The ECB declined to comment.
The report was compiled to challenge the EU banking industry’s push to show that it already had higher capital levels than its US counterparts, as part of the sector’s lobbying efforts to water down the new rules, which it claims put it at an even bigger disadvantage to American rivals.
The European Banking Federation teamed up with consultants Oliver Wyman to produce a study last year that said the common equity tier one – a routinely used capital benchmark – at larger EU banks over the past three years was on average 3.1 percentage points higher than US rivals.
One reason EU banks have higher capital ratios is a greater use of their own models, which can be used to downplay the riskiness of their assets. A lower level of these so-called “risk-weighted assets” boosts their relative capital levels.
US banks are restricted in their use of such accounting moves. European banks also hold bigger “management buffers” above their minimum capital requirements than US peers.
The EU law to implement Basle was finalised this year and will be phased in over the next eight years. The European Banking Authority has estimated it will increase minimum capital requirements for large and internationally active EU banks by 8.6 per cent and raise them for the biggest few banks classed as systemically important by 12.2 per cent.
Brussels lawmakers made several concessions to the industry and member states that included watering down capital requirements for small business and mortgage lending, and for banks’ insurance subsidiaries.
Earlier this year, the Fed cut a proposed increase to capital requirements for the country’s largest banks by more than half to 9 per cent after a large backlash from the industry and politicians against the so-called “Basle Endgame” rules.
However, regulators failed to agree on this proposal and now many bank executives are expecting a Trump administration to usher in a largely new regulatory team in Washington who will substantially weaken Basle Endgame or cancel it altogether.
Claudia Buch, chair of supervision at the ECB, told an event in Amsterdam this month that Europe should stick to the plans for implementing the Basle rules whatever the US does. She added that big Wall Street banks already have “significantly higher capital requirements” than their European counterparts. – Copyright The Financial Times Limited 2024