The European Commission endorses the efforts of international financial standards setters that seek to ensure coherent implementation across member jurisdictions. In this context, the Basel Committee’s Regulatory Consistency Assessment Programme (RCAP) is a welcome contribution.
In the implementation of international banking standards, the EU has taken a particularly ambitious approach, unique in the world, opting to apply a single rule book, based on standards designed for large internationally active banks, to all of its 8000 banks. This is very important from the point of view of international financial stability as these banks account for about EUR 45 trillion in total assets or 52% of global banking assets. Needless to say that the diversity of these 8000 banks in terms of size, complexity and legal form requires some adaptations in the law and a degree of additional flexibility for supervisors to reflect local specificities.
Against this background, EU banking legislation has been assessed in the RCAP as compliant or largely compliant in 12 of the 14 components assessed by the Basel Committee, thereby largely confirming the EU’s approach. Nevertheless, the RCAP report points out that there are certain differences between EU law and international standards.
EU banks are well capitalised. All 20 banks that participated in the RCAP are capitalised far above the required regulatory minima even when correcting for regulatory differences identified in the RCAP.
The good capitalisation of EU banks has been verified by the recent ECB/EBA stress tests. These tests were judged overwhelmingly as tough and credible by the global financial community, confirming the robustness of the EU's banking system. The stress tests, and subsequent recapitalisation for the small numbers of banks which demonstrated weaknesses, demonstrate that even under an adverse scenario, capital ratios do not fall below the required minima. Thus, EU banks are in practice required to meet capital ratios that exceed the legal minimum requirements. It must be noted that this additional layer of capital resulting from EU supervisory practice is not taken into account when the RCAP discusses potential for overstatement of capital ratios.
The European Commission also recalls, as set out in the detailed public response of the European Commission, the European Central Bank and the European Banking Authority included in the Report, that certain matters raised by the RCAP Report are a matter of interpretation. Some of the EU provisions portrayed as deviations could in fact be considered compatible with Basel III and some of the methodology used for quantifying deviations may exaggerate their severity. This, too, needs to be borne in mind when discussing the comparability of EU and international capital ratios. Moreover, the RCAP sample consisted of large internationally active banks and EU subsidiaries of third country investment banks. The vast majority of other EU banks are less likely to be affected to the same extent by the most prominent findings of the RCAP because they do not engage in the same activities to the same extent.
The European Commission believes that the RCAP reports of the Basel Committee can provide helpful transparency about banking laws at global level and give jurisdictions relevant indications for considering strengthening of supervisory practice and legislative review. Along the lines set out in the detailed public response, the RCAP may be taken into account in supervisory practice and future legislative reviews at the European level.
The Commission also recalls that the final shaping of the EU law is done by the EU legislator, the European Parliament and the Council. In the RCAP report, the so-called supporting factor for lending to small and medium-sized enterprises (SMEs) constitutes one of the important deviations that is relevant for the overall judgement of the EU's compliance. This factor offsets the increase in capital banks must hold for SME loans that would otherwise result from Basel III and was deliberately introduced by co-legislators in order to avoid negative repercussions of the new capital standards on economic growth, ensure that SMEs can continue to access bank credit and contribute to growth and employment in the real economy.
A second issue that materially affects the overall judgement is the result of certain exemptions from capital requirements for credit valuation adjustment (CVA) risk. This issue should be considered in the light of recent, new discussions in the Basel Committee. At its meeting on 22-23 September 2014, the Committee decided to introduce major changes to the requirements for CVA risk.
Finally, the third issue with significant impact on the overall grading is the possibility to exempt permanently certain exposures from Internal Ratings-Based approaches for credit risk. In this regard, European co-legislators agreed and have already requested EBA to issue guidelines at the latest in 2018, aimed at limiting the permanent partial use of the standardised approach for banks that otherwise use internal ratings when determining credit risk capital requirements. The perspective of these guidelines coming into place aligns the EU approach with the transitional periods allowed under the Basel framework.
 Which concern derivatives business and the implementation of internal ratings models.