Banking: European Council, Council Of The European Union, Agreement On Measures To Reduce Risk

On 25 May 2018, the Council agreed its stance on a package of measures aimed at reducing risk in the banking industry.

Ministers asked the presidency to start negotiations with the European Parliament as soon as the Parliament is ready to negotiate.

The proposals are intended to implement reforms agreed at international level following the 2007-08 financial crisis. Presented in November 2016, they include elements agreed by the Basel Committee on Banking Supervision and by the Financial Stability Board (FSB).

Strengthening existing EU rules, the aim is to ensure that any outstanding challenges to financial stability are correctly addressed.

“The agreement on the banking package today will enable us to make progress on other elements of the banking union”, said Vladislav Goranov, minister for finance of Bulgaria, which currently holds the Council presidency. “Today’s agreement will send a positive signal to the market. We hope therefore that the European Parliament will be able shortly to start negotiations, allowing us to agree these proposals and enact them as soon as possible”, he said.

The package agreed by the Council comprises two regulations and two directives, relating to:

bank capital requirements (amendments to regulation 575/2013 and directive 2013/36/EU);
the recovery and resolution of banks in difficulty (amendments to directive 2014/59/EU and regulation 806/2014).

The proposals on bank capital requirements include a binding leverage ratio to prevent banks from excessively increasing leverage, and a binding net stable funding ratio.

They strengthen risk-sensitive capital requirements for banks that trade largely in securities and derivatives. And they require global-systemically important institutions ('G-SIIs') to have more loss-absorbing and recapitalisation capacity in case of resolution.

The proposals on bank recovery and resolution implement the FSB's November 2015 standard on 'total loss-absorbing capacity' (TLAC).

They integrate the TLAC requirement into the EU's 'minimum requirement for own funds and eligible liabilities' (MREL) rules. Whereas the TLAC standard sets out requirements for G-SIIs only, the MREL covers the entire EU banking industry; the proposals address this and other differences between the two.

A compromise was agreed today between ministers on a number of issues, including:

the necessary level and quality of the subordination of liabilities in the event of G-SIIs, or other banks that could pose a systemic risk to financial stability, having to be resolved;
implementation of new market risk capital requirements, the Basel committee's 'fundamental review of the trading book';
an adjusted methodology for calculation of the G-SII ‘score’.

Agreement was reached at a meeting of the Economic and Financial Affairs Council.

The Council needs a qualified majority, in agreement with the European Parliament, to adopt the package. (Legal basis: articles 53(1) and 114 of the Treaty on the Functioning of the European Union.)

Risk sharing and banking union

Progress on reducing risk is necessary if further progress is to be achieved in the sharing of risk within the EU’s banking union, in line with Council conclusions of June 2016. The European Council is due to review the progress achieved so far in reducing risk in the EU banking industry in June 2018 and could decide on specific steps to be taken.

The Council agreed in June 2016 that:

in line with risk reduction measures, it may be decided to set up a common backstop to the EU’s single resolution fund for failing banks ahead of the 2024 agreed start date;
negotiations on a proposed European deposit insurance scheme for banks would start as soon as sufficient progress has been made on risk reduction.

Member states’ experts have been working meanwhile on a possible list of criteria or indicators to measure progress in reducing risk in the banking sector.

The banking union is aimed at placing Europe’s banking industry on a sounder footing, whilst ensuring that unviable banks are resolved without using taxpayers’ money. Launched in 2012 to address the bank-sovereign nexus in Europe, it involves a transfer of responsibility to the EU level. It currently comprises the 19 countries of the euro area, whilst 7 other member states have also indicated their intention to join.

Creditor hierarchy and the IFRS 9 standard

Two other of the Commission's November 2016 proposals were fast-tracked and adopted during 2017.

These relate to the ranking of unsecured debt instruments in insolvency proceedings, and a phase-in of the regulatory capital impact of the IFRS 9 international accounting standard. They also provide for a phase-out of provisions on the large exposures treatment of public sector debt denominated in non-domestic EU currencies.