February 21. 2024. 7:37

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SVB collapse: Time to ‘rethink’ banking package, says file rapporteur

The collapse of Silicon Valley Bank (SVB) and the market turmoil of the past week must push EU policymakers to rethink their approach to banking regulation and keep regulatory standards high, MEP Jonás Fernández told EURACTIV.

Increasing interest rates and higher inflation make for a “complex” financial context after years of low growth and close-to-zero rates, Fernández, who leads the EU Parliament’s work on financial regulation, said in an interview with EURACTIV on Thursday (16 March).

“It’s been 15 years since the 2008 Global Financial Crisis, and many stakeholders started to think that the main pressures on the banking sector came down to one thing: regulation,” he added.

But the SVB collapse might prove them wrong.

The past week has seen markets experience possibly the worst financial instability since the fall of the Lehman Brothers bank in 2008. Three American banks – SVB, Silvergate and Signature – failed over the weekend due to a downturn in the US crypto and tech sectors, followed by liquidity traps as they ran out of cash to pay back deposits from corporate clients.

“It is a fact: when interest rates go up, some business models fail,” the EU lawmaker said.

There was a regulatory mishap, too: unlike the EU, small and mid-size US banks do not fall within the scope of the Basel III prudential requirements, which determine the minimum level of free cash a bank must maintain to deal with unexpected losses.

So who is to blame? Fernández points to the Trump administration, responsible for lifting regulatory oversight for mid-size banks.

SVB collapse has ‘limited’ impact on EU banks, Commission says

The collapse of Silicon Valley Bank (SVB) in the US only has a “limited impact” on EU markets, and the EU banking sector remains “in good shape”, financial services Commissioner Mairead McGuinness told lawmakers on Wednesday.

Banking package needs reviewing

For now, the SVB collapse might only have a limited effect on EU markets, the Commission’s financial regulation chief Mairead McGuinness told a plenary debate on Wednesday (15 March).

But that doesn’t mean that all is well and good.

“There remain differences between the European Parliament and the Council’s positions on the transposition of the Basel standards into the EU Banking regulation,” Fernández, the file rapporteur, warned.

Interinstitutional negotiations over these legislative changes, best known as the ‘Banking package’, started just a few weeks ago. They should wrap up by the summer, Fernández estimates.

The package looks to review the Capital Requirements Directive and Regulation (CRD/CRR) to better fit Basel III standards. Notably, the EU wants to include minimum capital requirements for banks to “restore the credibility of internal models and ensure that there is a level playing field between institutions that use different approaches to calculate capital requirements”, according to the Commission proposal.

In the past, the amount of cash banks would put aside to back themselves up in case of unexpected losses would only be determined through the application of bank-internal statistical models. However, as higher capital requirements tend to decrease banks’ overall profitability, banks would aim to keep capital buffers to a minimum.

The Basel III standards, as they are being implemented in EU legislation, instead aim to set an “output floor” to these internal models, setting a limit to how low the internally calculated capital requirements can go.

Should this output floor be increased even further in light of the crisis? “No, that’s not the focus,” Fernández said.

Instead, he points to applying new capital requirements for banks handling cryptoassets. It’s a clear ask from the Parliament, although the EU Council’s General Approach – the position of EU member states – makes no mention of it.

Transitional arrangements for banks to apply the new capital requirements under the Banking Package should also be reviewed, he said, so banks can get their act together faster.

More generally, the MEP hopes that the SVB collapse serves as a lesson that the EU must not put its guard down.

“I encourage co-legislators to review how we all think about banking regulation,” he said, adding that Basel III requirements must be implemented to their fullest extent in the EU – which is not the case today.

Valdis Dombrovskis and Mairead McGuinness

Commission wants more capital buffers for EU banks – in about a decade

Through a newly proposed banking package the EU commission is trying to find a balance between increasing financial stability, protecting bank profits and sustainability concerns.

Mid-size banks in resolution limbo

During the Parliamentary debate, Fernández called on McGuinness to work harder and faster on a legislative proposal to better manage bank failures in the EU – which has so far been delayed for over a year.

“There seem to be different levels of ambition within the Commission,” Fernández said, adding that decisive action is required now.

Bank failures are handled through the EU’s Crisis Management Framework (CMF). The biggest banks, the failure of which would present a systemic risk to the Union’s financial stability, need to go through resolution, in which the European supervisor would step in to ensure the continuity of the bank’s critical functions and ensure financial stability.

Small banks, however, would need to file for insolvency in a national jurisdiction just like any other company.

“Yet for mid-sized banks, it is not clear which process they should enter,” the rapporteur said. “We need to increase the scope of resolution” under the CMF, he said.

Another priority is to continue to push for the highly controversial European Deposit Insurance Scheme (EDIS), he added.

“You know how it is: at the end of the day, a deposit insurance scheme would bring the EU closer to a fiscal union”, he said, explaining that banking risks could be insured at a European level, thus reducing the threat a bank’s failure could pose to the finances of a single member state.

The Commission had planned to make another attempt at reviewing several legislative pieces of the Crisis Management and Insurance Deposit framework (CMDI) in March this year, but the file has so far been delayed due to a lack of consensus between member states.

“This is no time to bring regulatory barriers down,” Fernández concluded, emphasising that the EU must continue working towards a full-fledged Banking and Capital Markets Union.

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