EU to delay Basel bank trading reforms as US revisits plans

The EU will defer the application of key provisions of post-crisis banking reforms by one year, arguing that expected US delays to Basel implementation would disadvantage lenders in Europe.

The move, championed by France, raises further doubts over the enforcement of the so-called Basel III package, an ambitious overhaul of bank regulation agreed in the wake of the 2008 financial crisis that the EU was planning to complete by 2025.

Following signs that US regulators would allow their timeline to slip for the so-called “Basel Endgame”, the European Commission decided to defer the “fundamental review of the trading book” to January 2026.

“Essentially it’s down to a level playing field. We have decided, given all of the evidence and delays elsewhere, to postpone the market risk rules,” said Mairead McGuinness, the EU commissioner for financial services.

The specific reforms, which were unveiled in 2016 as a measure to stop gaming of the regime, would require investment banks to hold more capital against their wholesale trading books with the aim of limiting market risk as they buy and sell securities from clients.

Confirming that the EU would delay the specific reforms by one year, Ms McGuinness added: “I would hope that the US and other jurisdictions will adopt the standards faithfully and quickly.”

Large euro zone lenders have long sought a delay to the rules, arguing that implementing stricter capital requirements would put them at a disadvantage compared to American and British banks.

“If you can’t offer to corporate clients the same products and conditions from day one you will lose competitiveness in the trading business,” said Gonzalo Gasos of the European Banking Federation.

French president Emmanuel Macron recently called on the EU to “revise the application” of Basel, saying the EU “cannot be the only economic area in the world that applies it”.

A commission spokesperson said the rest of the remaining Basel implementation package would apply from 2025 as scheduled.

The US has planned to implement its version of the Basel Endgame rules by July 2025, but US regulators’ initial proposals were met by an aggressive lobbying effort by banks. Regulators received hundreds of comments in response to the initial proposal.

Jay Powell, chair of the Federal Reserve which is part of the US efforts behind Basel Endgame, said earlier this year that “broad and material changes” were likely to be made to the final rule.

He has not excluded a re-proposal rather than a more simple redrafting of the rule. The Fed is currently working with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to address comments from the financial industry.

Federal agencies rarely opt for re-proposals, which delay the rule-making process. But issuing final measures that are markedly different from initial proposals may open agencies up to criticism about the public being deprived of a comment period to weigh in on the tweaked rules.

Ms McGuiness also expressed deep frustration over the EU’s failure to make progress on integrating its financial markets, complaining the latest proposal by the commission to harmonise the EU’s 27 different insolvency laws was “significantly watered down” by the parliament and member states.

Speaking at an event in Frankfurt, Germany, on Tuesday, she said a failure to do more – such as proposals to revive securitisation markets that package up bank loans and sell them to investors – would have an “enormous cost” as it would deprive Europe of the funding needed to tackle its main economic challenges including the green transition and digitisation.

Ms McGuiness, whose term as commissioner is due to end in October, urged governments to stop thinking about “what they could lose” nationally and to think more about “what they could gain” from Europe as a single market.

“Preservation isn’t growth,” she said, adding that “nibbling at the edge of the problem will not work”. – Copyright The Financial Times Limited 2024