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France, Germany and Italy have asked the European Commission to consider changes to the EU’s Basel III framework implementation, due to come into effect in January, in order to protect “the competitiveness of the financial sector”.
The request — made in a letter sent by the countries’ finance ministers to the top civil servant in the Commission’s financial services department — comes as US regulators consider changes to so-called “Basel Endgame” regulations following industry lobbying. Politico on Friday reported on a draft of the letter, a copy of which has been seen by The Banker.
The letter called on the commission to “finetune our banking regulatory framework, in view not only of ensuring a level playing field at the international level, but also of making it more balanced, risk-sensitive, effective and proportionate.”
A level playing field “with other major jurisdictions within the micro-prudential framework, both in terms of timing of implementation and in terms of substance and operational burden” was the first of six areas requiring attention highlighted by the letter, as part of a pause on “large-scale initiatives”.
Such changes would come on top of the EU’s decision in July to postpone the implementation of part of the Basel III package by one year to January 2026.
European lenders remain significantly smaller than their counterparts in the US; no EU-based lender ranked in the top 10 of The Banker’s Top 1000 World Banks ranking (compared to four from the US), with just three lenders — Crédit Agricole, BNP Paribas and Santander — represented in the top 20.
Banks in Europe also suffer from lower profitability than their US counterparts, in large part because US banks gain higher net fee and commission income from operating in their deeper capital markets. European banks also lack scale relative to their US counterparts, with the EU’s proposed banking union still some distance from coming into effect.
Former Italian prime minister Mario Draghi in a report published last month warned that the EU needs massive investment, more co-ordinated industrial policy and speedier decision-making if it is to keep pace with developments in China and the US.
A spokesperson for the European Banking Federation told The Banker: “The ministers’ letter well reflects the spirit of competitiveness, also outlined in the Draghi report. It is important to find the right balance between high levels of resilience and competitiveness.”
The letter from the EU’s three largest economies comes as discussions over changes to Basel Endgame in the US continue with little sign of resolution. While the Federal Reserve announced revisions to the framework in September, it has yet to publish a new draft due to reports of divisions among different US regulators.
Last month the UK also eased plans to impose stricter capital requirements on UK banks, pushing back the start date of the new regime by six months to the beginning of 2026.
The minister’s letter has been criticised by non-profit group Finance Watch for “[hinting] at reducing prudential safeguards, which could expose the financial system to greater risks”.
“Weakening capital requirements or downplaying actual risks fosters moral hazards where society bears all the losses while banks reap the rewards,” the organisation said in a statement released on Friday.
Thierry Philipponnat, chief economist at Finance Watch, argued how “competitiveness has become the latest catch-all term in Brussels, increasingly used as a convenient excuse to avoid completing the crucial work necessary to prevent another financial crisis like the one that struck 15 years ago”.
As warned in a recent report by Finance Watch, abandoning international co-operation on similar Basel rules to preserve the financial system’s stability under the guise of competitiveness could trigger a regulatory race to the bottom in the banking sector.
Beyond revisions to the Basel III framework, the ministers have also called for climate and transition risks to be addressed in a more “realistic” way by promoting “a gradual transition for enterprises while ensuring a level playing field”. Specifically, they call for a review of the green asset ratio for financial institutions, a metric aimed at quantifying EU taxonomy-aligned assets as a percentage of total covered assets.
The metric has been criticised by the banking industry, with the EBF in January claiming that the ratio cannot be considered as an indicator of progress on meeting sustainability commitments, as major parts of the economy financed by banks are not tracked by it.