The European Union has decided to delay tough new capital requirements for banks in order to encourage business and consumer lending during the coronavirus crisis.
Valdis Dombrovskis, Europe’s financial regulation chief, says support for lending remains the overriding priority in the fight against the worldwide pandemic.
He said stricter standards that would force banks to raise additional equity would be ill-advised at this time.
Dombrovskis commended moves by global regulators last week to delay the launch of new capital standards by one year. Brussels would ensure that European banks are in a position to take advantage of the extension, he said.
“It’s a welcome development because it gives us more time,” Dombrovskis, the European Commission’s executive vice-president in charge of economic and financial policy, said in an interview. “Our intention of course is to use this possibility.”
The move would help ensure “that banks are financing the real economy,” he added.
Heavy reliance on bank loans
Social distancing and lockdowns have forced millions of businesses to put their operations on hold, raising the real possibility of a global recession.
European policymakers, like their counterparts everywhere, are scrambling to find ways to keep credit flowing throughout the economy.
Governments have initiated loan guarantee programmes; supervisors have unleashed lending capacity by reducing the capital cushion banks are required to maintain to cover potential bad loans.
EU officials note that the bloc’s economy is particularly dependent on bank financing because of its underdeveloped capital markets.
Reassessing policy timetable for 2020
Dombrovskis said Brussels would now reassess its policy timetable for 2020.
The initial plan included making legal proposals in the second quarter to implement the latest round of international capital rules set by the Basel Committee on Banking Supervision.
“Already now we are adjusting our work programme, postponing certain other work streams, and having an extra year here of course is helping,” he said. “We will need to go through now and see exactly what is needed.”
Banking groups have strongly lobbied against the Basel rule changes, which overhaul standards for how banks should measure the risk of losses on their investments.
Banks are concerned they could lead to an increase in capital requirements forcing banks to rein in lending.
Regulators insist that the measures, which complete the Basel III rule book drawn up after the 2008 financial crisis, will boost banks’ resilience to shocks.
The new standards would lower capital by €124.8bn (£111bn)
The European Banking Authority, an EU watchdog, estimated in December that the new standards could increase banks’ capital requirements by 23% compared with a June 2018 baseline, triggering a shortfall in total capital of €124.8bn.
But Dombrovskis said the impact would ultimately depend on policy choices made at EU level, given that the standards needed to be implemented through European law.
He pointed out that the G20 had agreed not to let this round of Basel rulemaking create a further significant increase in overall capital requirements across the sector.
“That’s something we are looking very carefully at,” he said.