One size tights never fit all ‒ did the Parliament forget EU citizens in its compromise on Basel III regulation?

The transposition of the Basel III standards awaits implementation in the EU. The aim of the reform is to improve risk calculation and comparability between banks. Image: Shutterstock
  • The European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted on 24 January 2023 to finalise reforms of the Basel III rules on banking.
  • In Finance Finland’s opinion, the ECON Committee’s position does not take national specificities sufficiently into account.
  • The ECON Committee’s position is slightly improved compared to the original position of the rapporteur to the Parliament.

The transposition of the final Basel III standards awaits implementation in the EU. The aim of the reform is to improve risk calculation and comparability between banks. The Basel Committee’s mandate in the reform was to avoid a significant increase in capital requirements for banks.

Long-running negotiations on the EU implementation of Basel III, the reform of banks’ capital requirement legislation, reached another milestone after the Parliament’s Committee on Economic and Monetary Affairs (ECON) voted on its official position. Finance Finland’s Head of Banking Regulation Olli Salmi considers the Parliament’s approach quite puritanical.

“Unfortunately, the Committee barely took the specificities of national markets into account. But even this cloud has a silver lining: at least the most adverse proposals were rejected”, notes Salmi.

In risk calculation, for example, some of the proposals that threatened to impair the risk sensitivity of the calculations were discarded. Banks were also given time to adapt to the changes.

Unlike the global Basel standards, the drafting of EU legislation has until now aimed for ease of application and suitability in different EU member states. Salmi considers this a good approach.

“One size tights never fit all. Some of the Basel standards are directly applicable in some market structures, but less so in others.”

Salmi gives an example of a case in which this good regulatory approach was now neglected.

“In some EU states, the repayment of mortgages is low or tapers off after a certain period. The Basel proposal regarding mortgages is well suited for these countries. In Finland, mortgages are paid off in full, but the Basel standard does not take this into account.”

In regulation, quality should trump quantity

In the implementation of the Basel standards, European authorities have lobbied firmly against the transposition typical to EU regulation. European banking regulation is quite obviously much tighter compared to other economic regions, and words like ‘lenient’ or ‘relaxed’ hardly apply to it. The British, for example, do not appear to have had similar steep obstacles in accounting for national specificities in their own implementation.

“It is unfortunate that EU policymakers don’t seem to realise that the aim should not be on regulating as much as possible. Instead, the aim should be on making as high-quality regulation as possible. This is not the way things are at the moment.”

In high-quality regulation, packages and individual pieces of legislation are drafted for a specific purpose while still maintaining ease of application. The end result is not complex and obscure regulation that fails to fully reach its objectives.

Finland’s stance on the Basel III reform has been discussed in the Finnish Parliament’s Commerce Committee, which understands how important it is to prepare legislation that is suited to the Finnish context. Even so, the Parliament’s Grand Committee, which defines Finland’s official negotiating positions in EU matters, only reached a sufficiently concrete stance at a late point in the process, leaving it too late to properly acknowledge Finnish specificities in the European Council.

“Banks will adapt to regulation because they literally have no other choice. What is more concerning is that the poorer a fit regulation is for society, the more society must compromise and adapt, which may not be painless. Finland’s strategies and aims concerning EU regulation are therefore something the next Government should focus on”, summarises Salmi.

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Financial and Prudential Regulation

Olli Salmi

Head of Banking Regulation