The European Union plans to mitigate the impact of minimum capital requirements for leading banks that arise from new global banking reforms affecting their trading operations, an EU official said on Wednesday.
The EU is set to adopt the Fundamental Review of the Trading Book, a key part of the Basel III package, from January next year. As they have already delayed its implementation to maintain the competitiveness of their leaders amid delays in other financial centres. Also, the rules have not yet been implemented in Britain or the US.
The FRTB governs capital and reporting requirements for banks’ trading assets, including how risks should be measured using banks’ own standard methods and own calculations. It seeks to better align banks’ capital requirements with their trading activity.
European banks have urged the European Union not to introduce new laws or regulations that could hinder their operations, especially if similar requirements are not imposed on competitors in the US and the UK, which is unlikely any time soon.
Temporarily, the EU is introducing an adjustment mechanism, a multiplier which will reduce the capital burden from the banks caused by the strict FRTB rules. This helps prevent capital requirements from spiking excessively, making the transition to new trading book regulations easier.
The plan formed a part of the consultation launched last year. The European Commission said the design of the multiplier should be risk-sensitive, straightforward, and easy to implement, maintain, and supervise.
The Trump Administration is trying to ease regulations on American banks. It is moving closer to proposing a new version of the Basel Endgame rules, which dictate how large banks must measure their risk. This has put pressure on rival jurisdictions seeking to keep their financial institutions competitive. The Bank of England has officially delayed the implementation of FRTB till 2028.
