Mixed response for ECB compromise on Basel III adjustments

A proposal by the European Central Bank (ECB) to allow European regulators some scope to apply or relax certain aspects of Basel III as part of macro-prudential policy has met with a mixed response from central bankers.

The proposal, set out in a January 25 opinion paper, is seen by some as a compromise between those who want the fourth Capital Requirements Directive (CRD IV) – which will implement Basel III in Europe – to be a single set of rules applicable to all, and those who want national regulators to have the power to adjust the new standards for macro-prudential purposes. Under the ECB plan, oversight would be left to the newly created European Systemic Risk Board (ESRB).

“It is important for banking regulation to be harmonised as much as possible across the European Union (EU) to foster the single market,” says Mauro Grande, director-general for financial stability at the ECB in Frankfurt. “If a national authority wants to go above the requirements set by the CRD IV for macro-prudential purposes, this should happen under a framework of constrained discretion. National authorities should give the ESRB prior notification to allow for an ESRB assessment of possible unintended consequences of the stricter requirements, such as possible negative spill-over effects on other countries. The national regulator should repeal the policy when the ESRB indicates that the underlying macro-prudential reasons are no longer there. If this does not occur, the ESRB can issue a recommendation to the European Commission to take action against the member state.”

National authorities would not be able to move regulatory standards lower than the common minimum set out in CRD IV, or change the basic definitions of capital and liquidity contained within the directive. Instead, they would only be able to tinker with capital ratios, economic exposures, leverage ratios and liquidity ratios – a more limited list than the 42 possible macro-prudential tools under discussion in European regulatory circles last November.

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