EU Wants Basel To Look Again At Bank Risk Model Rules

The European Union wants the Basel Committee on Banking Supervision to reexamine its rules governing banks’ capital requirements and restrictions on internal risk controls, according to reports on Thursday (Sept. 29).

Valdis Dombrovskis, VP of financial services under the European Commission, is urging the Basel Committee to take another look at its rules as financial institutions voice concerns that the restrictions would lead to hundreds of billions of dollars worth of charges. Reports explained that the committee is planning to introduce capital floors that would cap the financial gains earned by banks for using their own models instead of those of regulators. Dombrovskis said on Thursday that the floors should be thrown out.

“A solution we could not support is one which would weigh unduly on the financing of the broader economy in Europe,” the Commission VP said. “At a time when we are focused on supporting investment, we want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe’s banking sector.”

According to reports, the internal controls are used by banks to estimate risk from real estate, corporate and infrastructure lending. Dombrovskis argued that the committee’s proposals would “imply significant capital requirement increases in all areas,” placing EU banks “at a disadvantage compared to our global competitors.”

He is also calling on policymakers to take another look at their proposals that would restrict the use of banks’ own, internal controls for operational risks, like cybercrime and fraud.

The European Banking Authority’s head, Andrea Enria, also said on Thursday that banks’ internal controls have “not delivered.”

“The outcome of the internal models in some areas has been short of the risks that have eventually materialized,” he stated. “In those areas, we could probably have some adjustment.”