- Finance Finland (FFI) is disappointed in the Commission’s proposal for the implementation of the final Basel III standards.
- The proposed changes would raise EU banks’ capital requirements. The calculation of capital requirements would also less accurately reflect risks.
- Finnish banks are highly solvent and have supported their customers in many ways during the pandemic.
The aim of the final Basel III reform is to improve risk calculation and comparability between banks. The Basel Committee’s mandate in the reform was to avoid significantly raising capital requirements for banks. According to the Finnish Financial Supervisory Authority FIN-FSA, Finnish banks’ capital requirements could rise by an average of 15–20%.
On 27 October, the European Commission published its proposal for the implementation of the final Basel III standards. Finance Finland (FFI) is disappointed in the Commission’s proposal and notes that it does not take the needs of EU member states sufficiently into account. This must be fixed when the proposal enters further discussion in different EU platforms.
The Basel Committee on Banking Supervision published the final elements of the Basel III standards in December 2017. This included significant changes in banks’ capital requirements regulation, especially regarding the risk assessment of banks’ assets. The overall aim of the reform is to improve comparability between banks and to fix a number of shortcomings in current regulation.
When the reform was started, one of the preconditions laid down was to avoid significantly raising capital requirements for banks. However, the impact assessments of supervisors and research institutions indicate that the reform is about to raise the requirements especially in the EU area. The calculation of capital requirements may also less accurately reflect risks in the future. The main cause for this impairment is the output floor for risk-weighted assets, which limits the extent to which banks can utilise the results of their internal risk models in the calculation of capital requirements. Such models are approved by banking supervisors.
The Commission has included some elements that seek to mitigate the reform’s effects on EU banks and their customers. Unfortunately, this work was left halfway. FFI and the European Banking Federation (EBF), among others, have proposed a way of implementation that would accommodate for the special characteristics of the EU financial market and support banks’ capacity to finance the green transition.
“It is regrettable that the Commission has not listened to the concerns expressed by banks and many other concerned entities. The reform threatens to raise capital requirements also for Finnish banks. As the coronavirus crisis has proven, this is not justified: Finnish banks have strong capital positions and have supported their customers in many ways during the pandemic”, says FFI’s Managing Director Piia-Noora Kauppi.
The Commission’s proposal is about to enter discussions in the European Council and the European Parliament. The negotiations can be expected to last a long time because of the scope and complexity of the package. According to the Commission, the reforms could enter into force in the beginning of 2025.
“The ball is now in the court of member states and the Parliament. It is important that Finland takes a clear position on the proposal and demands that the implementation of the reform is carried out in rational way from the viewpoint of EU countries. We must maintain the risk-based nature of banks’ capital requirements and make sure the requirements are raised as little as possible”, Kauppi emphasises.
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