EU Could Struggle with Full Basel Compliance, says Fitch

Making European Union (EU) banking regulation fully compliant with Basel standards will be tough, but important for enhancing consistency and comparability, and restoring investors’ confidence in risk-weighted assets (RWA), Fitch Ratings says.

According to the credit ratings agency (CRA), this is because addressing all the major non-compliance issues raised by the Basel Committee’s ongoing regulatory consistency assessment programme (RCAP) on 5 December would require changes to the EU’s capital requirements regulation (CRR).

The Basel Committee has focused since 2012 on reducing excessive variability in banks’ RWA calculations and enhancing disclosure. The consistency of risk weights is critical for calibrating and analysing bank capital globally, as the RWA, alongside leverage, form the foundation for capital requirements, and also forthcoming total loss-absorbing capacity (TLAC) requirements for global systemically important banks, which are proposed at 16%-20% of RWA and 6% of leverage assets.

Fitch notes that European bank capitalisation has strengthened notably since the financial crisis, including ahead of the 2014 European Central Bank (ECB) comprehensive assessment, despite the Basel Committee’s “materially non-compliant” grading for the EU. However, there is more to do to ensure banks’ reported RWAs are consistent and credible.

The RCAP highlights the complexities in comparing bank capital across borders. Differences in accounting rules and market practices also add to challenges for global comparability. An EU move to improve Basel compliance would aid comparability and analysis of bank capital, and reduce investor scepticism.

Other jurisdictions have less work to do, says Fitch. The US assessment, released on the same day, found that implementation of the securitisation framework did not meet Basel standards, although the US was “largely compliant”. Previously, Brazil, China, Singapore, Switzerland, Australia and Canada were graded overall “compliant”, but most jurisdictions will have some less material elements of non-compliance.

The European Commission (EC) highlighted the political nature of the EU legislative process for implementing Basel standards and concerns about economic growth in a press release responding to the RCAP. The Commission also says that the EU’s divergences from Basel are partly influenced by its highly ambitious approach of applying a single rule book to all its 8,000 banks, even though the global standards agreed in Basel are designed to apply only to large, internationally active banks.

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