The European Commission published a large package of new capital rules for banks. The CBI has supported international efforts to improve the resilience of the financial system. At the same time, the low interest rate environment and the constantly changing regulatory landscape are putting banks under pressure. Policy-makers should carefully think through the knock-on impact of new rules on banks’ ability to service the wider economy and provide the finance needed for growth.

The capital requirements package main job is to implement a long list of measures from the international Basel III framework. First, a binding 3 per cent leverage ratio will cap the overall equity to assets ratio and complement the existing risk-weighted capital rules. In the UK, the Prudential Regulation Authority (PRA) had already introduced a leverage ratio at the beginning of 2016. A few business lines will receive more favourable treatment under the leverage ratio, notably officially guaranteed export credits, derivative clearing and public development banks.

The European Commission’s proposals introduce a Net Stable Funding Ratio aimed at making sure banks’ funding models rely sufficiently on long term funding to weather financial crises, when the market for short-term intra-bank loans may run dry. Although supportive of the overall aim, the CBI has already expressed concerns that the rules should not unnecessarily penalise derivative trading, on which non-financial companies rely to hedge currency, interest and commodity price risks.

The package also reviews the existing framework for market risk following the Basel Committee’s Fundamental Review of the Trading Book. It would strengthen rules to avoid risks of credit instructions being too exposed to a single or a few counterparties. Next, the Total Loss Absorbing Capacity for the EU’s biggest banks will require them to hold liabilities that can be written down or converted into equity in case of resolution.

Beyond these – and many more – proposals that chiefly focus on stability, the Commission has put forward a few ideas that are more growth focussed. The regulatory burden for smaller banks should also be reduced, notably in terms of reporting, disclosure and remuneration, and banks would need to hold less capital against infrastructure investment and favourable treatment of SME loans is extended.

Whereas these pro-growth measures may help certain parts of the economy to access funding, they are unlikely to alleviate further pressure on banks’ profitability. With more Basel rules on the horizon, a challenging low-interest rate environment, talks of de-regulation in the US, the need to digitalise and invest in fin-tech, UK banks face challenges on many fronts. The CBI will work with members to understand how these will impact the ability to lend and services the wider economy.

Source: CBI