EU member states will not be able to set their own minimum bank
capital requirements, but can raise countercyclical buffers on
individual banks where appropriate, according to the draft
Capital Requirements Directive (CRD) 4, released on Wednesday.
In a press conference in Brussels on July 20, the EC's Internal
Markets commissioner Michel Barnier said that although
flexibility is important, regulatory arbitrage needs to be
"If we want supervisors to control groups across Europe, we
need to do it with the same rules, not 27 different rules,"
"Single rules don’t mean you don’t
take account of specificities of countries or specific risks,"
Barnier also said that within this system there is enough
flexibility for the supervisors to cater for risk by setting
extra requirements for capital at a level deemed appropriate.
"With over 8,000 banks in Europe, including 4,000 cooperative
banks, it’s impossible to have one rule for all,"
Allowing individual regulators to set individual buffers where
appropriate, he said, lays down the letter and the spirit of
the Basel accords while not affecting small-to-medium
Ratings agencies are also set to be weakened by the new rules.
Barnier said the financial system is too dependent on ratings,
so the new prudential rules rid references to ratings
"We are proposing to strengthen the requirements for banks to
carry out their own risk analysis without resting in a
mechanical fashion on the ratings agencies," he said,
Stronger corporate governance standards are also to be
introduced for banks – something not required in Basel
III. Barnier said banks will be required to diversify their
board members in terms of gender and background.
In addition, supervisors will also have the power to impose
fines to banks that don’t meet new reporting
CRD 4 implements Basel III into European law, making it the
first of all G20 signatories to do so.
The 600-page Directive requires banks to hold 8% of their own
funds, supplemented by 2.5% as a countercyclical buffer. Banks
will also require a capital conservation buffer in place in
order to distribute dividends.
Barnier said rules will also come into place regarding
short-term liquidity ratios and counterparty risk in relation
Banks will need to raise €460 billion ($653 billion) of
extra capital by 2019 to meet the new standards, said Barnier.
"When these measures are in place, there will be a 70% drop in
the risk of a crisis in the bank sector," he said.
He accepted that the increased capital requirements will cost
the economy to a degree, but that these costs will be
compensated by the greater stability, visibility and confidence
that a stronger regulatory framework will bring.
Confident, not naïve
Barnier also used the press conference to call for the US to
implement the Basel III accords.
"To make sure we have a level playing field to avoid regulatory
arbitrage, we want to make sure all the G20 signatories
– the US, China; everyone needs to respect the
commitments," he said.
"I made the point recently to [US Treasury Secretary] Tim
Geithner, that we’re looking to the Americans to
implement Basel two-and-a-half, and they promised it would
happen in 2011. It is 2011."
"I’m confident without being naïve," he