Brussels-based NGO Finance Watch emphasizes the urgent need for stringent banking regulations to safeguard financial stability. However, the organization warns that a lack of political will is hindering progress.
European policymakers are increasingly called upon to bolster the resilience of banks against potential future financial crises.
In a recent report, Finance Watch highlighted the importance of learning from the 2008 financial crash, which they claim has largely faded from institutional memory.
As global challenges evolve, the NGO cautions that “global cooperation has been overshadowed by competition.”
The report specifically points out the stagnation in the implementation of Basel III, an important accord established to fortify banks against potential crises.
Despite various warning signs, this complacency among regulators is concerning. “The recent failures of Crédit Suisse and several banks in the US, including Silicon Valley Bank, should have acted as a wake-up call,” stated Christian M. Stiefmüller, Finance Watch’s senior research and advocacy adviser. “Instead of simplifying the Basel III framework to facilitate global consensus, its complexity has seemingly had the opposite effect, pushing major jurisdictions, including the EU, to retreat from the modest accomplishments of the Basel III agreement.”
Examining Basel III Regulations
Basel III, formulated by the Basel Committee on Banking Supervision (BCBS), aims to ensure that banks maintain sufficient capital reserves for emergencies. The regulations focus on enhancing capital, liquidity, and leverage requirements to mitigate risky banking behaviors.
In its latest report, Finance Watch draws attention to several shortcomings in the current regulatory framework.
One significant concern is a regulatory grey area, as Basel III is only applicable to “internationally active” banks, lacking clear definitions. The report also questions the efficacy of Basel III, suggesting it may be “too complex to be effective.”
Challenges with Buffer Requirements
Finance Watch expresses concern regarding the wavering interpretation of the Combined Buffer Requirement (CBR), a capital cushion banks must maintain beyond their minimum capital needs.
“During the pandemic, when banks were encouraged to use their buffers, it sparked lively debates, exposing significant uncertainty about their practical application,” the NGO stated. “This ambiguity surrounding the nature and purpose of individual buffers, coupled with a lack of distinction between structural and cyclical elements, seems to have fostered unrealistic expectations about their usability.”
Another pressing issue involves banks using internal models for risk calculation, which, although tailored to specific practices, may compromise the fundamental aims of Basel’s regulations.
Institutional Pushback
Finance Watch appeals to European policymakers at both the Union and member-state levels to recommit to the Basel process and engage actively with global partners, especially in the US, to avoid a regulatory “race to the bottom.” The organization emphasizes the need for the simplification and harmonization of rules to ensure a fair playing field for internationally active banks.
However, calls for stricter regulations and safety net measures face staunch opposition. Earlier this month, the Federal Reserve backed down from a proposed increase in capital requirements for the largest US banks, reducing a suggested 19% rise to just 9% due to industry pressure.
Progress in EU Financial Regulation
In the EU, a recent assessment by former Italian PM Mario Draghi indicated that the bloc’s interpretation of the Basel framework may be overly restrictive.
“The EU has implemented a wide range of prudential regulations derived from the Basel committees’ international standards,” Draghi noted. “While these regulations are vital for financial stability, the EU has been accused of ‘gold-plating’ the Basel framework, leading to excessive caution among banks.”
Finance Watch countered this claim, asserting, “In reality, the EU risks non-compliance with Basel standards.” Similarly, the UK has diluted its Basel framework plans to prioritize growth and competitiveness.
The Bank of England’s Prudential Regulation Authority (PRA) announced this month that capital requirements for UK banks would remain “virtually unchanged,” now projecting a mere aggregate increase of less than 1% once transitional arrangements conclude in January 2030, down from an earlier proposed 3% increase.
Photo credit & article inspired by: Euronews
