Ref. Ares(2021)245538 - 12/01/2021
Ref. Ares(2021)3182278 - 12/05/2021
POSITION PAPER
.
30 January 2020
CAPITAL REQUIREMENTS
Implementing the final Basel III reforms in the EU
Financial market stability is fundamental for the European economy and its companies.
For this reason, following the financial crisis, BusinessEurope supported reinforcing
prudential rules and strengthening supervision. The new rules have restored confidence
in financial institutions and made them more resilient. At the same time, bank lending
came under pressure and there is a significant risk that as economic growth picks up
banks will be less able to meet companies’ funding requirements on the necessary scale.
That is why we have expressed concerns that additional tightening of prudential rules
should not further increase financing problems. We also emphasised the importance of
the SME Supporting Factor for the financing of smaller and medium-sized companies
and argued that new capital requirements should not discourage the use of hedging
instruments due to reduced availability and/or higher prices, neutralising the relief
provided by the European Market Infrastructure Regulation (EMIR).
New prudential rules should therefore strike the right balance between ensuring financial
stability and supporting companies’ financing needs for investments and business
activities, with specific attention to long term debt financing and equity investment. This
requires a tailored implementation of Basel III in order to avoid that future changes to
capital requirements put EU firms at a competitive disadvantage compared to their
international peers (figures put forward by the European Banking Authority raise a level
playing field issue with an increase of 23% of capital requirement for EU banks compared
to 1.5% for US banks). The output floor should therefore only be applied to international
capital requirements, excluding Pillar 2 and EU specific buffers, and as a backstop. It
should also be applied at the group level of a banking group and not by entity.
Recent changes to capital requirements have increased the cost of capital in a context
of low profitability of banks, which is a decisive factor for lending conditions in the market.
Future changes to those rules should not significantly increase capital requirements
overall, as requested by EU institutions, to support companies’ need for capital for
investment and trade (bank loans, equity investment, trade finance) and ensure access
to risk management products at competitive terms.
BusinessEurope is worried about a number of studies (such as those carried out by the
EBA, EBA and ECB, Bundesbank, Copenhagen Economics, and Deutsches
Aktieninstitut on hedging activities) some of which argue that finalization of Basel III could
lead to a significant increase of capital requirements for EU banks with impacts for the
financing conditions of corporates, and increases of such magnitude that effects are
expected to negatively impact GDP in a long transition period and even permanently.
We are thus highly concerned that financing conditions for non-financial companies will
deteriorate when the EU must invest at an unprecedented level to meet the challenges
of energy, climate change mitigation, economic and digital transitions, and transform its
economic production model. BusinessEurope therefore urges the legislator to pay
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careful attention to the EU market structure before approving any new standards in order
to strike the right balance.
This includes:
•
Maintaining risk sensitivity and an adequate prudential treatment of
unrated companies. One of the most important areas of change with
significant impacts are rules to restrict risk sensitivity of internal models
(output-floors) as to credit risk. The output floor limits the calculation of
credit risk and associated capital required through internal models to
72,5% of the standardized approach. This would, in particular, negatively
impact the lending capabilities for well-performing “unrated companies”
with solid business models and therefore low credit risk profiles. It would
also affect loans that are well collateralized, e.g. by equipment and
machinery, which could also be considered as low risk. The design of the
output floor should be set with a view to minimize the impact on the
European economy and the prudential treatment of unrated companies in
the EU should be at least equivalent to the one applied in jurisdictions
where the use of external ratings is not allowed (such as the USA). That
is why the output floor should be applied at the highest level of
consolidation, and only to international capital requirements as a
backstop. Alternatives that provide close substitutes to formal external
ratings should also be explored. Issues to be considered are the use of
parent ratings, the use of existing bank ratings, and the use of certain
types of national central bank creditworthiness evaluations.
•
A maintained SME Supporting Factor. The SME Supporting Factor
reduces the cost of lending to smaller and medium-sized companies. It is
vital to maintain it in order to mitigate the disadvantaged position of such
lending due to the combined effect of enhanced capital requirements and
liquidity rules.
•
A maintained Infrastructure Supporting Factor. The revised Capital
Requirements Regulation includes a factor that reduces the cost of
lending for infrastructure projects which respect specific criteria. The
infrastructure Supporting Factor is not included in the Basel III framework
but should be confirmed in its European transposition.
Maintaining the
Infrastructure Supporting Factor should go hand in hand with an
appropriate prudential treatment of infrastructure projects, which are a
European franchise.
•
A maintained Credit Valuation Risk Exemption and an appropriate
calibration of the Standardised Approach for Counterparty Credit
Risk. In 2013, when the current rules were negotiated, the legislator
recognized the specifics of the use of derivatives by non-financial
companies to hedge corporate risks by exempting uncollateralised
exposures from derivatives with non-financial counterparties used for
hedging purposes from the own funds requirements for credit valuation
risks (CVA risks). The importance of the exemption should be recognised
and there should be no additional capital requirements in this context
.
Another significant cost increasing factor for corporate hedging activities
follows from the required application of the Standardised Approach for
Counterparty Credit Risk concerning various prudential calculations
regarding derivatives. An overly conservative calibration of this method
together with the very strict output floor will make hedging activities for
non-financial companies much more expensive. This is even more
Capital Requirements – Implementing the final Basel III reforms in the EU
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relevant as the USA has already made some announcements on that
topic.
•
Creating a low risk category for specialised lending. Project financing
plays a significant role in the area of Public-Private-Partnerships projects,
supply chain investments and the financing of certain export business.
Proposed Basel III rules suggest much higher risk weights which might
not be justifiable for all kinds of project financing. We therefore suggest
exploring the introduction of a low risk category on the basis of quality
criteria where this could be justified from a risk perspective.
•
Appropriate risk weights for the building sector. Basel III introduces
a specific category named
Land acquisition, development and
construction (ADC) exposures with a risk weight from 150% to 100%. In
this context, the boundaries of such a category should be clarified to
better determine the relevant risk weight, taking into account the
specificity of the real estate leasing, and to exclude cases in which other
sources of income contribute to repaying loans justifying a more favorable
prudential treatment.
•
Appropriate risk weight for leasing exposures. Leasing is a form of
finance that has been proven over the years to be both low risk,
sustainable, critical for future growth and for supporting companies
(especially SMEs) achieving EU environmental goals. It should thus be
supported. The current rules already overestimate the real risks of leasing
exposures and the new Basel proposals would discourage leasing even
more. Therefore, introducing a specific risk weight of 65% for corporate
leasing (and of 50% for retail leasing) under the Standardised Approach
would recognise the positive effect of owning the physical asset (i.e.
equipment, machinery, vehicles), while also ensuring any output floor
does not result in excessive limits on the internal ratings-based approach.
•
Revised treatment of certain equity exposures. Deep and liquid equity
markets are vital for supporting growth in the EU. An increase in
regulatory costs, in particular in the area of venture capital equity
investments, could lead to banks no longer performing the role of
facilitating investment in equity markets, and consequently, no longer
being able to support the European equities market. As the EU tries to
promote the provision of venture capital in general, it should be
considered whether a limited amount of bank exposures to equity stakes
in start-ups and young companies should receive an accommodative
prudential treatment.
•
Revised treatment of Unconditionally Cancellable Commitments.
From a corporate perspective, credit facilities play a significant role when
it comes to financing a company’s working capital. A change in the credit
conversion factor (CCF) used to calculate the capital requirement of
unconditionally cancellable commitments (UCCs), which are off-balance
sheet exposures, is required considering that the Basel III framework
identifies a specific CCF for UCCs (10%), penalizing the credit lines
granted and not used. Otherwise, financing of corporate exposure
entailing low risk (because the bank can unconditionally cancel its credit
line at any time) becomes disproportionally expensive for banks, leading
to worsened credit facility conditions for corporates.
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