We have taken a major step this week to make sure Europe’s 8,200 banks are more solid and more transparent. After 19 months of negotiations, the EU finance ministers have now endorsed the new deal for banks, putting in place the Basel III rules for Europe.
National supervisors will be given more responsibility and the option of asking banks to rein in their activities
By applying the Basel III rules to the 8,200 banks in Europe, we will honour one of our main G20 commitments. The succession of crises has taught us a lesson, and we are improving the solidity of banks, which will have to hold more liquid assets and equity capital of a higher quality to be able to absorb future shocks. All 27 Finance Ministers supported this.
The impact of this agreement justifies the lengthy negotiations that we have had: 19 months since my proposal, a time needed to hone the details of this text, adapt it to the European context, ensure its compliance with the Basel III rules and, lastly, check in detail that it is suited to meeting our main objective: that of ensuring that the banking sector can continue to finance the real economy.
I can only welcome the decision by the Basel Committee itself in early January to adjust its rules along the lines of our proposal, in particular by accepting the gradual application of any new liquidity coverage ratio between 2015 and 2019. For the first time, we will have a global rule on bank liquidity which will in future help us to avoid situations similar to the one in which Lehman Brothers found itself: a lack of liquidity leading to its catastrophic collapse.
Since the start of the legislative process, we have taken care throughout this work to act with caution and determination, without being affected by all those who would wish to undermine the strengthening of the rules and block this global reform, already implemented by a dozen jurisdictions such as South Africa, Canada, India and Switzerland, all countries whose economies continue to be duly financed.
Like these countries, Europe needs these reforms. Besides the liquidity rules and the increase in capital equity as a “crash mat” in times of crisis, the reform will introduce a leverage ratio between capital and assets, and greater consideration of the counterparty risks linked to exposure to derivatives. National supervisors will be given more responsibility and given the option of asking banks to rein in their activities in the event of a speculation bubble comparable to those which we saw in the internet or real estate sectors in some countries in Europe. The EU is also going further than its G20 commitment. Bankers’ bonuses will have to be more moderate so as to discourage excessive risk-taking.
I congratulate the European Parliament, which stuck to its guns on this point and imposed limits on the relative size of bonuses compared to salaries. Boards of directors will have to make managers more accountable, particularly as regards exposure to risk, and banks will need to disclose tax information for each country in which they operate.
Other jurisdictions of the G20 should follow the EU’s example on these matters to make sure that rules are more convergent in different parts of the world. One essential point is that this regulatory progress is designed to apply throughout the single market of the 27 member states. It will allow us to establish the basis for a “single rulebook” to also cover other rules which we are currently strengthening.
These include the provisions on the protection of deposits, which are already guaranteed up to €100,000 per depositor in all member states, and on tools to resolve banking crises in order to avoid taxpayers having to subsidise banks in difficulties.
Beyond the single market, it is essential that we achieve the uniform application of the rules on a global scale. Only regulatory convergence will make it possible to avoid the risk of arbitrage and foster financial stability. We need to reflect on how to reinforce global governance in the field of financial services, and the regulation of banks in particular, in order to have more solid guarantees that the G20 commitments will really be honoured by everyone.
The EU will hold its promise and apply Basel III from January 2014 onwards. We are waiting now for the US to do the same. This issue was a focal point for my recent visit to Washington and New York, during which my hosts expressed their determination to fully enforce Basel III in the coming months. Europe and the US must advance in tandem, and in a spirit of mutual trust, to enforce the new rules. A lasting return to financial stability hinges on it.
Michel Barnier is a member of the European Commission responsible for the internal market and services.