01 June 2016

Financial Times: France and Italy move to counter EU push for tougher bank rules

Elke König, chairwoman of the Single Resolution Board, the eurozone agency tasked with handling bank crises, has said the board may force some banks to have loss-absorbing reserves of “well above” 8 per cent of their liabilities — previously seen as the EU benchmark.

This has raised Franco-Italian fears that the EU’s biggest banks could effectively be forced to exceed a related international standard agreed last year by the G20.

In a joint paper, the two countries’ finance ministries call for a cap on how far eurozone bank regulators can exceed the international minimum rules, known as Total-Loss Absorbing Capacity (TLAC).

The TLAC rules have been hailed by Mark Carney, Bank of England governor, as heralding the end of an era of “too-big-to-fail” banks. They require banks to structure their balance sheets so a sizeable chunk of their liabilities can be easily written off, or converted into new equity, if they get into financial difficulties.

In their paper, submitted to other capitals and the European Commission in May, the two countries urge that any move to make banks exceed international norms should only happen in “exceptional” circumstances. Banks should also never be expected to have TLAC of more than 8 per cent, they argue, compared with the 6.75 per cent minimum set out in the international standard.

But some of the architects of the tougher EU bank rules adopted since the financial crisis say the Franco-Italian stance is a mistake. Sven Giegold, a German member of the European Parliament’s economic and monetary affairs committee, told the FT that the position amounted to “France and Italy doing their too-big-to-fail banks a favour . . . That is an unjustifiable risk to European taxpayers.”

France and Italy say that while they support the international standard, the risks of going further are manifold. According to the paper, going beyond an 8 per cent TLAC requirement “would result in additional funding costs for banks and could cause difficulty in a context where it is difficult to anticipate the depth of the market of European banks’ subordinated debt”.

Full article on Financial Times (subscription required)

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