PwC Malta has welcomed some of the provisions of the updated Basel proposals, explaining that they would help smaller banks – but the overall impact of other factors is still dependent on developments in the US.

Fabio Axisa, banking and capital markets leader at PwC Malta, said: “Europe’s move to implement ‘proportionality’ is an important step, especially for the large number of smaller institutions in the EU, including those in Malta.  This should decrease part of the regulatory burden that smaller banks have been facing.”

The European Commission published its first proposals last month for revised rules to calibrate capital and liquidity requirements, which will represent Europe’s attempt to legislate for rules being globally agreed at the Basel Committee for Banking Supervision (BCBS).

For the most part, the Commission’s proposals seek to implement the Basel III proposals with only limited differences in scope, timing and calibration, together with the first parts of what the banking industry community refers to as Basel IV.  With this update, the Commission is also introducing the concept of ‘proportionality’, so reporting and compliance burdens would be simplified for Europe’s smaller, less risky banks.

Europe’s move to implement ‘proportionality’ is an important step, especially for the large number of smaller institutions in the EU, including those in Malta

The new rules, which are subject to further discussions with the EU Parliament and Council, include the introduction of a minimum leverage ratio (of three per cent), as well as a binding liquidity requirement to ensure stable funding of banks’ activities (a Net Stable Funding Ratio), both of which would take effect in 2019.

Of the so-called ‘Basel IV’ rules set, the EU is planning to implement new capital and margin rules covering derivatives and market risks inherent in banks’ trading activities. The proposal introduces new bail-in capital rules and the implementation of new rules to account for non-performing loans (IFRS 9) for prudential purposes.  These revisions are set to come into force from 2019, with some only fully implemented by 2022, a bit later than the BCBS had recommended.

“Europe has been concerned to ensure that new capital requirements would impair economic growth across the Union. To that effect, the NSFR proposal, for instance, provides specific treatments for some instruments such as low risk covered bonds and trade finance, among others,” PwC Malta explained.

“Importantly, the new rules also include a provision to require non-EU banks operating multiple subsidiaries in the EU to form new EU-based ‘intermediate holding company’, a move which could have specific implications for international banks operating their EU base from the UK.

“From an even broader international perspective, transatlantic discussions about new capital requirements remain complex and could change if the incoming US administration takes a significantly different approach to that of the previous administration. The Basel Committee had previously suggested that an agreement on the new credit and operational risk rules could be reached by end of 2016. European officials will now be closely following developments in the US to understand the scope for completing implementation of Basel IV rules there, as a basis for providing the global consistency envisaged under the BCBS process.”

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