The EU is set to make its banking sector more resilient to financial shocks, as stricter capital requirements for banks and investment firms were given political approval by the Economic and Financial Affairs Council on 15 May 2012. Today's unanimous agreement provides a basis for negotiations with the European Parliament.
These new rules aim to increase financial stability by making banks better equipped to manage their risks and absorb shocks similar to those of the last few years. At the same time, they will contribute to sustainable economic growth by ensuring that credit continues to flow to the real economy and by introducing harmonised rules required by the single market.
The proposals (a regulation and a directive) will turn into EU law a comprehensive set of international standards known as the Basel III agreement. It is expected that the EU will thereby become the first area in the world to enact the measures developed by the Basel Committee for Banking Supervision and endorsed by the G20 leaders in 2010. While the Basel agreements target only about 120 'internationally active banks', the EU legislation will apply to all 8300 European banks.
Under the draft legislation, all EU banks will have to hold more top-quality capital to be able to cover unexpected losses. This common equity tier 1 (CET 1) capital will have to total 4.5% of risk-weighted assets, up from 2% under current rules. Furthermore, member states will have the possibility of raising prudential requirements (e.g. concerning the level of own funds or public disclosure) for domestically authorised institutions and of increasing certain risk weights.
In addition to these minimum capital requirements, two capital buffers must be introduced throughout the EU. Firstly, banks must maintain a conservation buffer of CET 1 equivalent to 2.5% of their risk-weighted assets - otherwise they cannot pay out dividends or bonuses. Secondly, member states will have to set an institution-specific counter-cyclical buffer, to avoid excessive lending.
On top of these, each member state may impose a systemic risk buffer of CET 1 on the financial sector, or part of it, in order to avert systemic risks. This buffer could be up to 3 to 5% depending on the type of exposure, or even higher with prior Commission authorisation.
Provisions on liquidity and leverage include the introduction of an EU-wide liquidity ratio from 2015, and - if the Council and Parliament so decide - a leverage ratio from 2018.
Stronger governance and supervision requirements will give supervisors the possibility of imposing sanctions if the rules are breached.
The talks with the Parliament will aim for adoption of the package by the end of June 2012, as called for by the March European Council.
Bank capital rules (press release in pdf)
Council debate (video in all languages)
Council press conference (video in several languages)
Council press release (covers the whole meeting, in pdf)
Regulatory capital (EU Single Market webpages) (en,fr)