In an opinion adopted during its March plenary, the European Economic and Social Committee (EESC) welcomed the European Commission (EC) proposal to implement the remaining elements of the Basel III international standards in the EU. The aim is to strengthen the resilience of the banking sector while ensuring that it continues to finance economic activity and growth. But the EESC also calls on the EC to find a proper balance between faithful implementation, and the need to reflect the specificities of the EU economy and banks.
The EESC welcomes the new regulation proposal on prudential requirements for credit institutions, but says it must strike a balance between ensuring that EU banks become more resilient, and that the sector is financially sound and competitive enough to be able to finance the real economy. The proposal should also enhance the current rules, to continue to prevent excessive risk-taking, high leverage and speculative behaviours. Periodical assessments of its actual impact need to be performed. Furthermore, the Committee welcomes the EC's approach of strengthening the focus on Environmental, Social and Governance (ESG) risks, but also the work of the European Banking Authority (EBA), to properly assess banks' environmental risks and their finance strategy for the green transition. Finally, the EESC asks the EBA to speed up its scrutiny work on the pillar one framework, and strengthen its efforts to address the shortcomings in the current ESG disclosures at EU level.
EESC rapporteur Bogdan Preda comments: The New Banking Package 2021 is probably one of the most technical and complicated dossiers concerning the banking industry to have ever been debated at the EESC, aimed at enhancing the financial market in the EU and thus safeguarding the interests of European citizens by not exposing them to increased financial risks. As Rapporteur to this opinion that has been debated in the months before and during the first week of Russia’s invasion in Ukraine, which is likely to massively change the European economic landscape especially in terms of energy deals, I have to say it shall be of particular interest to follow how EU banks and governments shall be able to cope with the challenge of preserving market stability, while at the same time implementing the remaining elements of the Basel III prudential capital requirements.
To strike a balance
The Committee acknowledges that the EU needs rules to cater for its challenges (i.e. the recovery, and the green and digital transitions), specific characteristics (bank credit is by far the main financing channel for the economy), and ambitions (a Capital Markets Union and the Green Deal). A faithful but fair implementation of the remaining elements of the Basel III standards is important to limit the risk of regulatory arbitrage and to create confidence and predictability for investors and regulators.
On the other hand, it is imperative that European citizens and taxpayers are not exposed to the increased risks of a financial market crisis. Financial market stability is a crucial prerequisite for overall economic stability and is, therefore, in the common public interest. Sound regulation and surveillance of the banking sector to prevent the threat of turbulence and crisis is essential, while prudential capital requirements are instrumental in avoiding the use of public funds for rescuing banks in distress.
Therefore, the EESC calls on the EC to further evaluate the specific features of European banks. The Commission must ensure that the legislative proposals find the proper balance between the implementation of Basel III, and the need to put forward adjustments to reflect the specificities of both the EU economy and the EU banks.
In addition, the Committee insists that the new regulation should not only safeguard financial market stability, but it should also not lead to an unjustifiable increase in capital requirements for EU banks. The EESC asks the EC to ensure that the impact on capital requirements, including on small cooperative banks and small banks, is not too burdensome and so should not impact their competitiveness, while also taking care to ensure financial market stability.
Financial markets can and should support and enhance the transition to a more sustainable and greener economy. However, the banking sector cannot deliver this long-lasting change alone. Industrial policies and the relevant EU and national legal frameworks should become fully consistent towards promoting sustainable investment opportunities. They need to influence the allocation of economic resources in this direction, but also remove fossil fuel subsidies and reconcile climate objectives with social needs.
For this reason, the EESC welcomes the strengthening of ESG (Environmental, Social and Governance) related provisions in legislative proposals. It also calls on the EC to clarify the applicability of the provisions regarding the powers of supervisors.
In addition, the EESC welcomes the ESG disclosure work from the European Banking Authority aimed at properly assessing banks' environmental risks and their finance strategy for the transition to a net-zero carbon economy. The Committee also calls on the EBA to speed up its scrutinising work on the Pillar One framework, to determine whether it sufficiently captures the unique features of climate risks.
Finally, the EESC asks the EBA to strengthen its endeavours to address the shortcomings in the current ESG disclosures at EU level, including on fossil fuel-related assets and assets subject to chronic and severe climate change events. The idea is to encourage a substantial increase in the sustainable finance strategies of banks.