Basel III: Improvements urgently needed

Berlin, June 3, 2022

vdp criticises proposals of EU parliamentary rapporteur Jonás Fernández and calls for appropriate and Basel-compliant shaping of capital rules

The Association of German Pfandbrief Banks (vdp) has strongly criticised the report that the rapporteur of the ECON Committee of the European Parliament, Jonás Fernández, presented on the EU banking package on June 1, 2022.

“The report falls well short of the, in part, meaningful suggestions contained in the EU Commission’s legislative proposal, and additionally envisages more tightening measures. Gold-plating or overfulfilling international rules in the EU – to the detriment of the EU’s own banks – is not suited to these times of crisis in which the banking sector, notably in Europe, is required more than ever to shoulder the main burden in terms of financing the big political projects,” Jens Tolckmitt, the vdp’s Chief Executive, emphatically stated. “The rapporteur’s suggestions would lead to a wholly inappropriate additional burden for the banking industry and jeopardise central political initiatives.”

Notwithstanding the fact that the EU Commission’s legislative proposal would result in a marked gold-plating of the Basel regulations, part of the European Parliament is now pushing for an even tougher line, as is shown by the report Fernández has released and which will serve as the basis for further negotiations by the EU Parliament. For instance, the rapporteur suggests that the relief-bringing transitional rules for residential real estate finance and the application of the so-called infrastructure supporting factor be tied to sustainability criteria. “A green supporting factor through the back door will not achieve the desired result. We continue to be of the opinion that capital backing must reflect the risk of a loan, not wishful thinking on the part of policymakers,” Tolckmitt remarked.

“An objectively unjustified mistrust of bank-internal risk models on the part of European institutions was already evident in the Commission’s proposal, and is now even more so in the Fernández report, although these models have been repeatedly examined, particularly in recent years, by supervisors and developed further by supervisors and banks,” Tolckmitt pointed out. “Banks that use these models would face a massive increase in capital requirements as a result. The real absurdity is that this effect would be greater the lower the risk a transaction entailed. This would also have a vast impact on real estate financing.” The consequences – if the gold-plating requirement were to prevail – would be dire, Tolckmitt warned. “Not only would unjustifiably higher capital requirements for low-risk transactions virtually force banks to move into riskier business areas or to refinance their business outside the balance sheet. It would also further reinforce the regulatory incentive to conduct parts of their financing business entirely outside of the banking sector in less rigorously regulated areas of the financial sector. This would be a dubious result in terms of financial stability, the strengthening of which supervisors gladly cite as the justification for their measures.”

The vdp continues to advocate an appropriate and Basel-compliant shaping of the Basel III capital rules that will not further hamper the performance of the banking system or place additional strain on the real economy. “Particularly in these times, the straitjacket that now constrains the banking sector after 14 uninterrupted years of one-sided regulation must not to be tied even tighter,” Tolckmitt stressed.

It is not yet too late to make improvements to the implementation proposal from Brussels, which the Pfandbrief banks believe are urgently needed. The vdp calls on the European institutions that will participate in the forthcoming talks to reduce substantially the burdens real estate finance providers are expected to face. The rules provide plenty of levers with which to achieve this, and the EU Commission’s proposal offers useful starting points. For example, the envisaged provision whereby the particularly low-risk business of residential real estate financing is to be treated differently could apply permanently – not just temporarily until 2032 – and be extended to include commercial real estate financing, which is also low-risk.