The European Commission’s decision to give banks temporary relief from the capital impact of the Basel III Fundamental Review of the Trading Book has been broadly welcomed by supervisory officials, central bankers and industry players, but not by all. 

While most supported the delay, one senior EU risk adviser The Banker spoke to sees the EC’s move as a race to the prudential bottom.

The EC announced the adoption of a delegated act to amend some Basel III provisions on June 4. The measures, which still have to be approved by the European parliament, would take effect for three years from January 1 2027. 

The decision follows delays in Basel III implementation in the US and the UK, leading to fears that European banks could face a competitive disadvantage. The UK has delayed the introduction of parts of the FRTB until 2028. There’s no timetable for implementation in the US, where industry consultation is now taking place.

The move is “an appropriate package of measures to facilitate the FRTB along all risk measurement approaches”, said Michael Theurer, member of the executive board of the German Bundesbank responsible for banking, financial supervision and stability.

The measures “enable banks to mitigate the impacts on own funds requirements and help banks reduce implementation burdens”, which is “essential for the market risk framework given its complexity”.  

“Further harmonisation and simplification are expected” after the three-year period, Theurer said.

The ECB backs the change. Executive board member Frank Elderson said in April that the EC’s proposals on market risk rules were a “sound” way to “smooth out these differences in the level playing field”. A spokesperson for the ECB confirmed that the position remains unchanged. 

Race to the bottom

The Basel III measures were developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007 to 2009. 

The decision to alter them shows a “typical regulatory race to the bottom” set off by the “ill-conceived” decision by Federal Reserve vice-chair for supervision Michelle Bowman to weaken US capital requirements, said Richard Portes, who co-chairs the European Systemic Risk Board’s joint expert group on non-bank financial intermediation. 

“The EU banks complain they will be ‘less competitive’. But remember that having built up their capital base after the global financial crisis, they got through the Covid crisis unscathed,” Portes said. “Meanwhile, loose regulation in the US led to SVB and other bank failures, also demonstrating weakness of a range of mid-market regional banks. It is unwise to follow the US.”

Deregulation is justified in some areas, but dangerous in finance, Portes argued. He accepts that regulation of capital and liquidity for banks is too complicated, and needs to be simplified. 

But ignoring or delaying implementation of agreed Basel III rules is “asking for trouble. Why did they agree the rules in the first place? Do they think the world has become less risky than when the Basel agreement was made?” Risk has in fact increased, Portes said, pointing to “extremely high” current equity valuations, the rise of private credit, and growing interconnections between banks and non-banks.

Too many clocks

The European Banking Authority, tasked with supporting financial stability in the EU, welcomed the change. “Considering the diverse interest of different stakeholders, the Commission put forward a balanced plan for adapting the framework to the changed international environment, within the boundaries set by the empowerment,” a spokesperson said. 

While there will “naturally” be follow-up questions, the move provides the time needed to develop more permanent changes to the framework, said the EBA. 

Banking associations in the Netherlands and Denmark also welcomed the decision. European banks “currently operate under adverse conditions compared to other major jurisdictions, which are modernising their regulatory frameworks” to increase economic growth, said Sean Hove, deputy director for credit institution regulation and capital markets at Finans Denmark. “Unnecessary high capital levels risk constraining banks’ lending capacity.”

The fragmentation of the EU’s capital markets needs to be overcome, Alain Papiasse, chair of BNP Paribas CIB, said at the Paris Europlace event on June 9. 

While there is a tendency to blame regulators, slow European reactions are also a political problem, he said. “We know there is a wake-up call. But everyone has a different clock.”

Basel IV, the final stage of post-2008 financial crisis reforms, is “absolutely not adapted” to the financing of suppliers for industrial projects such as the abortive plan by Dassault Aviation and Airbus to build a fighter jet, Papiasse added. 

The EC’s move is a “welcome and necessary step” to safeguard the competitiveness of EU banks, said José Ignacio Díaz Martínez, adviser on prudential regulation and banking supervision at the European Savings and Retail Banking Group in Brussels.  

Still, Díaz Martínez said, the draft delegated act would benefit from further specifications in areas including the treatment of the boundary between the trading book and the banking book, the governance of internal models during the transitional period, and the interaction with the output floor.

Europe cannot regulate its banking sector in isolation, said Caroline Liesegang, head of capital and risk management at the Association for Financial Markets in Europe. “The business is inherently global, so to some extent they have to go with the flow.”

The changes alone, Liesegang said, are “not a driving force to get more business into the EU”. For that, the EU needs to “continue to be ambitious”. Steps with potential, she said, include implementing the EU Savings and Investment Union to reduce capital market fragmentation.