BRUSSELS — EU banks may be bristling at a German proposal that they say could raise their cost of capital and hurt their profitability, but the German regulators behind it are convinced the plan has merit.
The Deutsche Bundesbank has proposed two important ways to slim down the weight of regulation on European banks, its contribution to the work of a European Central Bank task force that aims to present concrete recommendations to EU bodies by year-end.
The most contentious bit is a plan to separate the capital they use while still operating from the money set aside for use in case of bankruptcy. Under this framework, banks would no longer be able to use so-called Contingent Convertible (or CoCo) debt to meet their capital requirements on a day-to-day basis.
“There are some institutions relying on AT1 capital in ‘going-concern’ concepts. They would have to adapt,” Michael Theurer, the Bundesbank’s head of banking supervision, told POLITICO in an interview. “But … we believe that it is possible to implement it for the whole industry with a prudent calibration without any turbulence.”
CoCo bonds, also known as Additional Tier 1 capital, have been popular with European banks for the last 15 years. Debt is less expensive to issue than equity, and so AT1s have represented for many a more efficient way to meet capital requirements that were radically tightened by the 2010 Basel III accords.
AT1 bonds are also popular with investors: during the period of low interest rates after the financial crisis, they were a rare way for bond investors to earn a decent return without taking on too much risk. Industry estimates put the total amount of AT1 debt outstanding at over €200 billion, with over €14 billion of such bonds sold in the first half of this year alone.
But European regulators have been uneasy about them since 2023, when a quirk of Swiss regulation led to AT1 holders being wiped out before shareholders in the collapse of Credit Suisse. That violated the generally accepted rule that bondholders be paid before shareholders in the event of a failure. Even though the EU’s existing regulation explicitly forbids a scenario like Credit Suisse’s, the desire to avoid a repeat has cast a shadow over AT1s as an asset class. The Netherlands already proposed scrapping them last year.
That proposal was received with some puzzled looks in banking circles. Two bankers granted anonymity to speak freely about the issue said the German authorities didn’t formally contact lenders before making the proposals, leading to some initial confusion over their implications and to the fear that capital requirements would be raised.
This is true of a parallel, but separate, proposal by the Bundesbank to simplify the rulebook for small banks. While he declined to say by how much, Theurer noted that under a comparable new regime in Switzerland, small banks have to hold capital worth 8 percent of their total assets, rather than the 3 percent dictated by Basel III.
By contrast, Theurer said the AT1 plan could be implemented “without change regarding the level of capital requirements.”
Different priorities?
The proposals on the small bank regime mark a clear departure for the EU, which had initially applied tight new capital and liquidity standards to all banks, rather than just the larger, internationally active ones that the Basel III standards were aimed at.
Theurer said the feedback he has had on the new regime proposal for small banks “is mainly positive,” both at home and abroad. But since the Bundesbank made its proposals, there have been signs that other countries have different priorities: France, for example, has suggested reducing capital charges for its largest banks.
What the ECB task force, chaired by Vice President Luis de Guindos, will ultimately recommend is still unclear.
The ECB’s top banking supervisor, Claudia Buch, has warned repeatedly against allowing the pendulum to swing too far back in the direction of deregulation, and Klaas Knot, the former head of the Financial Stability Board, warned earlier this month against complacency engendered by 17 years of relative stability in the banking world since the global financial crisis.
However, the pressure from the private sector to undo past regulatory excess is huge.
“The EU needs a coordinated stocktake of the entire financial services rulebook: cutting outdated mandates, removing unnecessary guidance, and tackling structural barriers that prevent banks from operating at scale,” Adam Farkas, head of the Association for Financial Markets in Europe, said in a blog post on Thursday.
In recent years, U.S. banks have had more success than their European counterparts in persuading regulators to loosen the post-crisis shackles, to the point where some in Europe see themselves fatally handicapped.
Theurer said he expects Basel III implementation will be up for discussion next week on the sidelines of the International Monetary Fund’s annual meeting in Washington. He said his talks with U.S. counterparts are still “positive” and that “they are working cooperatively.” But he added, without specifying further, that some U.S. proposals “question current international agreements” and “indeed, there are some signals which worry us.”
Others outside the regulatory set put it more bluntly.
“Who the hell cares about the Basel accord, nowadays?” one banker asked, rhetorically. “Do you think the Americans care?”
