Basel III preventing banks from fuelling EU’s green economy, Deutsche Bank and BNP warn

Capital rules hinder banks’ ability to finance Europe’s economic transformation

by | June 15, 2021 | bobsguide

Capital requirements for banks risk stifling their ability to finance the transformation of European economies onto a green footing, Deutsche Bank CEO Christian Sewing and BNP Paribas chairman Jean Lemierre warned.

Speaking at the AFME/OMFIF European Financial Integration Virtual Conference on Monday, the pair discussed the role of banks in transforming European economies as they shift towards tackling climate change and digital transformation post-pandemic.

“A lot of the regulatory reforms, including Basel III, go in the right direction, but I think we need to be careful when applying these rules,” Sewing said. “Implementation of Basel III on average for large banks in Europe means a capital impact of approximately 20 to 25 percent.”

“That is happening in a situation where the Capital Markets Union is still underdeveloped, and at the same time we are fighting the pandemic and are preparing for the huge investments for the transformation which lies ahead of us. Then you actually take the fuel and the oxygen away from the banks,” he added.

Echoing these concerns, Lemierre argued banks cannot simultaneously amplify their capital buffers and focus on the transformational shifts that the EU is seeking to drive around technology and climate change.

“Banks need to have high capital requirements to be safe. But the sky cannot be the limit.”

“We need to have the capacity to shift good assets to investors,” he said.

Sewing’s and Lamierre’s warnings come as regulators across the globe are determining how best to implement Basel III capital rules, which are scheduled to enter into force in January 2023.

The US official sector has signalled it would make Basel III “capital neutral”. On this side of the Atlantic, some EU member states, including two of the bloc’s largest economies, Germany and France, are pushing to dilute capital requirements ahead of the official European Commission proposals, due in the second half of the year. Central to negotiations is where the EU would place the output floor: traditionally, EU banking regulation has applied this on all levels of a banking group, but the Basel Committee on Banking Supervision designed the capital rules to be implemented at the highest level of consolidation.

Given the fact the US economy is also projected to rebound to pre-pandemic levels this quarter, EU banks have argued that implementing strict capital requirements would put them at a disadvantage, given Europe’s more sluggish recovery.

Similarly, Sewing criticised the EU Single Resolution Fund, which was designed to be fully funded by the region’s banking sector to avert a 2008-style involvement of public money to bail out financial institutions, as being “the right tool to be implemented in 2016” but out of step with the problems Europe is currently facing.

Parts of those funds could be re-channelled “to directly fuel the economy, and to make sure that we can finance the transformation in these economies,” Sewing said.

As part of its 1.8 trillion euro stimulus package to national governments to tackle the economic effects of the pandemic, the EU is requiring that a third of the seven-year recovery budget is spent on financing the European Green Deal. The project aims to transform EU economies to be carbon neutral by 2050, decoupling economic growth from resource use.

(Additional reporting by Jeremy Chan)

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