France is pressure to eliminate certain fund requirements for the main lenders of the euro zone to put them equal to US competitors, according to a document consulted by Reuters.
The proposal of the French regulators would apply to the seven banks of world importance in the euro zone, four of which are French, as well as to other credit institutions whose evaluation exceeds 100 billion euros. According to this project, which until now has not been made public, the largest European banks would be subject to a single requirement, instead of two, to determine the amount of capital they must have to absorb their losses in case of failure.
These requirements were introduced ten years ago to avoid an essay of the 2008 world financial crisis, but are currently checked as part of a rough campaign directed by the United States, which has grown under the presidency of Donald Trump.
The ECB is examining proposals
The four -page document written by France, which has recently been the subject of a working group of the European Central Bank (ECB) responsible for simplifying bank rules, reflects concerns about the fact that US banks benefit from more favorable conditions. The proposal aims to rationalize the requirements instead of softening them, which would allow banks to grant more loans, but also make them more vulnerable.
However, it could lead to a drop in the requirements for certain banks. “A simpler framework for loss absorption capacity relations could be useful for both regulators and market actors,” said the banque of France and the prudential control and resolution authority (ACPR) in what the two institutions called an “informal document.”
The ECB Working Group will examine this proposal and another before making its own recommendations to the European Commission by the end of the year. This is part of the broader initiative of the simplification of the European Commission. According to prudential sources, the French project seems to have been designed to measure for the national banking sector, dominated by six main banks, and could face the resistance of other countries.
Germany, where regional and smaller lenders still represent almost half of the total, presented their own proposal at the beginning of the year, asking for a more flexible diet for this type of banks. The spokesman for the Banking of France, the Prudential and Resolution Control Authority and the ECB have refused to comment.
The Vice President of the ECB, Luis de Guindos, suggested last week that planned to reduce the amount of capital reserves in the EU. In the United States, regulators are preparing to reveal a broader review of the rules in terms of equity for making them more favorable for the sector. American banks are already subject to less strict requirements, for example, in terms of liquidity.
France offers a unique requirement
The French project provides the creation of a “unique requirement based on risk” that merges a global standard known as the total loss absorption capacity (TLAC) and the minimum requirement of European financing and eligible commitments (MREL). Currently, the TLAC only applies to banks of global systemic importance, which must also comply with MREL as all the main lenders of the 21 countries that make up the EU bank union.
The governor of the Banking of France, François Villeroy of Galhau, said at the beginning of the year that the coexistence of the MREL and the TLAC was “an obvious case of surface and complexity.” Although these two requirements are not entirely comparable, MREL is generally higher. BNP Paribas, the first French bank in terms of market capitalization, must have a total reserve of MREL equivalent to 27.03% of its risk assets, against only 22.84% within the framework of the TLAC.
A study conducted in 2024 by the Bank of France revealed that the average MREL requirements for overall systemic importance banks were approximately 3.5 percentage points for the average of the TLAC requirements applicable to their American counterparts.
French regulators have declared in their informal document that their proposal must avoid a “general adjustment” of the requirements in relation to the current situation and aim to be neutral. They also recommended using the TLAC rules instead of MREL to determine the proportion of a bank liabilities that must be subject or eligible to support losses in the context of a resolution.
Finally, the resolution authority, which for the largest banks is the EU Single Resolution Council, should be able to establish the “specific requirements for each bank” if necessary. The TLAC and MREL are only two of the requirements to which banks must meet. Among others, we can cite the lever ratio, which measures the capital of a bank compared to its total assets, and which must be at least 3%.
Source: BFM TV
