How the banking lobby diluted EU regulation

EU institutions have taken a position weakening international standards and risking bank stability.

Earlier this month, the European Parliament adopted its official stance on the banking package. By the summer the European Union will have diluted the international Basel standards, making European banks less stable but locking in profits for their shareholders.

After the 2008 crash, there was a consensus that taxpayers should never again pay for bank bailouts. In Germany, such bailouts cost taxpayers €70 billion, in Ireland they cost €42 billion and a whopping €1.5 trillion was spent on them across the EU.

The diagnosis was that banks had been allowed to take on too much risk for speculative purposes, against an implicit ‘too big to fail’ government backup. The proposed solution was a requirement of higher equity ratios, to provide an internal buffer for losses in times of crisis.

While industrial companies generally operate with equity ratios of at least 20 to 30 per cent, the ratios for banks are often in low single digits. Before its collapse in 2008, only 0.08 per cent of the capital at the disposal of the German Hypo Real Estate Bank, for instance, comprised equity.

New standards

For this reason, in 2010 the Basel Committee, the international body for banking regulation, agreed on new international standards. Although banks had just caused a massive global recession, they played an active part in those negotiations: 230 of 274 submissions came from industry groups.

Their biggest achievement was to uphold a system of ‘internal models’. This system allowed banks to report so called risk-weighted equity, which is not the kind of equity regular companies report. Since banks were doing the ‘risk weighing’ themselves, this allowed them to sustain lower actual equity ratios—and, as a result, higher profits.

Nonetheless, these ‘Basel III’ standards were an improvement on the status quo. The United States implemented the full requirements in 2014.

Heavily watered down

The EU, by contrast, partially implemented Basel III in 2013 and completion is only due this summer. Moreover, last November EU finance ministers adopted a heavily-watered-down proposal to do so; the European Parliament mostly supported the draft form of this this month.

The new version deviates strongly from Basel III as originally agreed. The final implementation should have increased existing capital requirements by an average of around 20 percentage points. Due to numerous exemptions in the internal models, the additional capital requirements have now shrunk to 4 per cent by 2030 (they will add up to 7 per cent by 2033).

In the event of losses, banks thus remain threatened by a higher probability of bankruptcy—still implying consequent bailouts worth billions of taxpayers’ money. In addition, certain measures are not to apply until 2032, 24 years after the financial crisis hit.

Massive pressure

The reason for this debacle is the massive pressure and resources of the European banking lobby. It did everything it could to weaken the proposed legislation. After all, the less equity banks have to hold, the higher their return on it—and so executive bonuses and shareholder dividends.

Finanzwende has analysed what the representatives of the financial industry have been doing in Brussels. We looked at the EU lobby register, as well as mandatory information provided by the authorities and parliamentarians involved.

Since the current president of the European Commission, Ursula von der Leyen, took office at the end of 2019, on Basel III representatives of the banking industry have met commission officials 176 times. These efforts have involved 70 financial groups and associations, employing around 300 lobbyists—with the French (Fédération bancaire française) and German (Bundesverband Deutscher Banken) banking associations ranking first and second for commission meetings. For comparison, civil-society representatives have only enjoyed two meetings with the commission on the topic during this time.

The lobbyists have been even more assiduous with the European Parliament: they met its rapporteurs and shadow rapporteurs alone around 200 times on the banking bill, which includes implementation of Basel III. At the forefront were individual players such as Deutsche Bank and Commerzbank. Deutsche Bank even visited some of the lead MEPs several times. Experts from civil society, on the other hand, only had four meetings on Basel III with MEPs.

Heavily criticised

This is not a fair competition of arguments. The parliament and commission should not let the banking lobby draft laws for them.

Even the European Central Bank and the European Banking Authority have heavily criticised the commission’s diluted proposal. In an open letter in November 2022, the ECB vice-president, Luis de Guindos, its head of banking supervision, Andrea Enria, and José Manuel Campa, chair of the EBA, directly addressed the responsible commissioner, Mairead McGuinness.

They called for complete, rapid and consistent implementation of the Basel III framework in the EU. They even warned of risks to the reputation and competitiveness of the EU’s financial sector. Yet the parliament and the commission remain in favour of diluting the international standards.

For now, the lobbying has proved successful: what the industry is calling a ‘Basel III compromise’ is in fact a massive victory for the banks. The tightening of rules promised after the financial crisis has failed to materialise. To ensure that the banking lobby does not dictate laws for all of Europe again, it is crucial to support the civil-society actors—which, among other things, shed light on it.