EU to assess suitability of bank debt rules

Jonathan Hill, the EU’s financial services chief, said he will assess the suitability of global rules on bank indebtedness and funding before implementing them within the bloc.

Mr Hill said that he will decide if it is “appropriate” to introduce a binding leverage ratio and net stable funding ratio proposed by the Basel Committee on Banking Supervision as part of the overhaul of its international banking rulebook developed in response to the 2008 financial crisis.

“The EU is a committed supporter and indeed driver of reforms in the global arena,” Mr Hill said yesterday in Brussels. “But as with our capital and liquidity rules, the EU should not be afraid to implement the international standards in a way that makes sense for Europe and Europe’s diverse financial landscape.”

The EU has faced criticism from the committee over its implementation of parts of the rulebook known as Basel III. The regulator last year found EU legislation on bank capital to be “materially non-compliant” with global standards, the lowest grade given by the group so far in a review process.

EU bank capital rules adopted in 2013 left it to the European Commission, the EU’s executive body on which Hill serves, to decide whether to make further proposals to introduce binding leverage and net stable funding ratios.

The Basel group brings together regulators from about 30 nations including the US, the UK, and China to co-ordinate rule-making. In response to the 2008 crisis, it toughened and expanded its standards to more than triple the core capital internationally active banks must hold.

The leverage ratio requires banks to have a minimum level of capital as a percentage of total assets, while the net stable funding rule requires them to finance long-term lending using sources that won’t dry up in a crisis.

The leverage ratio is still under discussion in the Basel committee, where regulators are debating whether it should be raised from its provisional level of 3% of total assets. Banks have been required to disclose leverage ratios since the start of this year.

The committee has said this is a preliminary step with a view to making the rule binding from January 1, 2018.

Mr Hill said the commission will need to decide “by the end of 2016 whether it is appropriate to introduce a binding leverage ratio or ratios in the EU. Were we to do so, we would also need to look at the level of these ratios. This is an issue where differentiation would be crucial” between the risks posed by different types of bank business models, he said.

On the net stable funding ratio, Mr Hill said the commission would not make a “hasty” decision. “Our decision to proceed, if appropriate, will be based on careful consideration of the options, and the impact on the diversity of business models in the European banking system.”

Bloomberg