Tag: european union

New global rules leave just 10 big EU banks short of capital, draft shows, BFSI News, ET BFSI

Banking & Finance

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* Capital shortfall seen at less than 27 bln euros

* Basel III directive also tackles climate change, branches

FRANKFURT, – Only 10 major European banks may need to raise capital as a result of the rollout of new global rules and their shortfall could be smaller than 27 billion euros ($31.43 billion), according to draft European Union regulation seen by Reuters.

The impact would be much smaller than the 52.2 billion euros estimated by the European Banking Authority (EBA) last year, a sigh of relief for a sector that has been plagued by low profits for a decade and is still recovering from a pandemic-induced recession.

The draft of European Commission‘s Basel III directive, which transposes the final batch of global rules aimed at avoiding a repeat of the 2008 financial crisis, put the increase to EU banks’ minimum capital requirements at between 0.7% and 2.7% by 2015 and 6.4%-8.4% by 2030.

“According to estimates provided by the EBA, this impact could lead a limited number of large EU banks (10 out of 99 banks in the test sample) to have to raise collectively… less than 27 billion euros,” the Commission said in the document.

The EBA said the banks in the test sample were from 17 EU countries and represented around 75% of total EU banks’ assets.

Banks had lobbied for a more flexible interpretation of the “output floor”, which limits their discretion in setting their own capital requirement, but their wishes were not fulfilled.

The European Parliament will have the final say on approving the rules, but regulators have warned the bloc not to stray from the standards already agreed at a global level.

The directive, which is due to be published next week, also gives supervisors the power to impose requirements relating to climate risk and contains stricter rules for branches of foreign banks in the EU.

This gives extra legal backing to the European Central Bank, which has been putting pressure on banks to disclose and tackle risks relating to climate change, such as weather hazards and changes in regulation.

As regards foreign branches, which had assets worth 510 billion euros at the end of last year and are concentrated in Belgium, France, Germany and Luxembourg, they will now be subject to a common authorisation procedure.

They will also have to comply with requirements relating to their capital, liquidity, governance and risk management, the draft shows. ($1 = 0.8591 euros) (Reporting by Huw Jones, Writing By Francesco Canepa in Frankfurt, Editing by Alex Richardson)



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ECB’s Vasle, BFSI News, ET BFSI

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Euro zone inflation is at risk of overshooting projections so the European Central Bank needs to carefully monitor price growth and should end its emergency stimulus programme next March, ECB policymaker Bostjan Vasle told Reuters.

Inflation has surged above the ECB’s target due to a long list of one-off factors, leading to fears that what was once considered a temporary price rise could become more permanent through higher wages and corporate pricing structures.

“There are early signs that in parts of the economy and certain regions, the risk regarding the labour market could become more material,” Vasle, a conservative member of the ECB’s Governing Council, said in an interview.

“In some parts of the economy, labour is in short supply and if this trend will continue, or spread to other sectors, it could pose a risk to inflation,” Vasle said. “That’s why I think we should be very careful about second round effects.”

While there is no hard data yet, anecdotal evidence from businesses indicates that labour shortages are becoming more pronounced and workers are demanding higher wages, Vasle added.

Fearing that the COVID-19 pandemic-induced recession would lead to a self-reinforcing deflation spiral, the ECB unleashed unprecedented stimulus last year to prop up the euro zone economy.

Although the 19-country bloc has now recovered nearly all of the lost output, the ECB has yet to dial back support significantly, even as other central banks have either started to tighten policy or signalled imminent moves.

The ECB will need to decide in December whether to wind down its 1.85 trillion euro Pandemic Emergency Purchase Programme and Vasle joined a growing chorus of policymakers backing its end.

“If these trends continue, then in next March it will be appropriate to end PEPP, as announced when the programme was implemented,” Vasle said.

“It’s also important to emphasize that even when we decide to end it, we’ll continue to provide plenty of liquidity to the economy with our other instruments.”

For the Q&A of this interview, click on

STILL FAVOURABLE

With inflation on the rise, markets are now pricing in an ECB interest rate hike before the end of next year, an aggressive stance that appears out of sync with the ECB’s interest rate guidance.

Vasle downplayed the significance of market-based rate expectations.

“I think we made clear what our intentions are and what will be the most important developments that will influence our decisions,” he said. “So, at the moment, I wouldn’t put too much emphasis on this shift.”

He also dismissed concerns about a recent rise in government bond yields, arguing that real, or inflation-adjusted, financing conditions remain favourable as defined by the ECB.

Vasle would not be drawn on whether the ECB should top up other instruments to compensate for lost asset purchase volumes but argued that the central bank cannot maintain all of the flexibility embedded in the emergency scheme.

“I’m not against a discussion regarding additional flexibility to our existing instruments,” Vasle added. “But I’d like to stress that in normal times, this sort of extraordinary flexibility would not be warranted.”

The ECB currently permits itself to buy up to a third of each member country’s debt and must buy broadly in line with the size of each economy, rules that may be up for discussion at its Dec. 16 meeting. Policymakers will also meet next week, when no change in policy is likely.

But increasing the share of supranational debt in the ECB’s portfolio appears an easier move.

“This would be a natural proposal and I expect it to be part of our discussion,” Vasle said. (Editing by Catherine Evans)



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European Union’s digital banknotes are getting ready, BFSI News, ET BFSI

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-By Ishwari Chavan

The currency aims to reach a population of 340 million, if adopted by all of the nations part of the Eurozone.

The European Central Bank, in July 2021 launched a digital euro project. The investigation phase that will start this month and last for about two years will aim to address key issues regarding design and distribution.

Central banks around the world, including the Reserve Bank of India, have been contemplating the launch of their very own CBDC. A total of 81 countries, representing 90% of global GDP, are exploring CBDC as of May 2021, compared with 35 countries in May 2020, according to Atlantic Council, a US think tank.

“Some of the other countries, like the UK and Sweden, also have their own projects, which are more or less in a similar stage in terms of progress, following their own path in terms of policy and design,” Aleksi Grym, head of digitalisation at Bank of Finland said.

The currency aims to reach a population of 340 million, if adopted by all of the nations part of the Eurozone.

What is Digital Euro?

The Digital Euro would be a form of central bank money issued by the European Central Bank, and will remain its liability at all times.

According to the ECB, the Digital Euro would still be a euro, like banknotes but digital. It would be an electronic form of money issued by the Eurosystem (the ECB and national central banks) and accessible to all citizens and firms. It will not be a parallel currency.

“The broad consensus is that CBDC would complement rather than substitute any existing part of the financial industry,” said Grym.

The operational and legislative framework to introduce the CBDC will be discussed with the European Parliament and other European institutions, and the access to the digital euro will be intermediated by the private sector.

What are the reasons to issue a digital Euro?

The Digital Euro will be a viable option for the Eurosystem, in order to support digitisation in payments. It could act as a new monetary policy transmission channel and mitigate risks to the normal provision of payment services, the ECB said.

The bank further mentioned that it could serve as a response to a significant decline in the role of cash as a means of payment.

Furthermore, the bank said that it could reduce the significant potential for foreign CBDCs or private digital payments to become widely used in the euro area while fostering the international role of the euro.

What will it look like?

The ECB has not yet specified a particular design of a Digital Euro. It wants to fulfil a number of principles and requirements including accessibility, robustness, safety, efficiency and privacy.

Although, based on the possible features of a Digital Euro, two broad types have been identified that would satisfy the desired characteristics – offline and online.

“The design of the CBDC has to be compatible with the objective of monetary and financial stability,” Grym said.

“For the Eurozone, we primarily look at retail CBDC, and the reason for that is that we already have quite a sort of advanced infrastructure for the wholesale cases,” he added.

When will the Eurozone have its CBDC?

The CBDC project was launched in July this year. However, the ECB has said that the end of this project will not necessarily result in the issuance of this currency, and that the central bank is merely preparing for the possibility of its issuance in the future.

“From the European perspective, we kind of envision what the world will look like not today but in 10, 20 or 30 years. The idea is that we’re looking at moving towards a much more digitized world, which is moving faster.That’s where cbdc will be designed for not necessarily the work we see today,” Grym said.

The investigation phase will examine the advantages and weaknesses of specific types of digital euro and how they would meet the needs and expectations of European citizens, businesses and financial intermediaries.



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Bank of England targets ‘failures’ in banks’ trading books, BFSI News, ET BFSI

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By Huw Jones

Banks must show from 2025 how their trading operations could be shut down in a crisis without spreading contagion across markets, the Bank of England proposed on Friday.

Since the global financial crisis in 2008-09, banks must have plans vetted by regulators showing how collapsing operations could be shut down or transferred without destabilising markets or the need for taxpayer bail-outs.

The proposals set out on Friday go further with more granular demands regarding trading books loaded with stocks, bonds and derivatives worth billions of pounds.

Following a public consultation, the BoE will publish final policy changes in the first half of 2022 which banks will have to implement by January 2025.

The BoE said its Prudential Regulation Authority carried out exercises between 2014 and 2021 which demonstrated that firms lack the full capabilities required to carry out an orderly wind-down of their trading activities.

“The PRA considers this lack of capabilities to be a market failure, posing risks to the PRA’s safety and soundness objective, and has therefore decided to clarify its expectations in this area,” the BoE said.

“For the largest firms, the destruction of trading book asset value in a disorderly wind-down risks impacting UK financial stability, due to the scale and interconnectivity of their trading activities.”

Applying the proposed new rules would mean a one-off cost of 12 million pounds ($16.35 million) as banks may have to restructure operations to make the plans workable. Annual maintenance costs would be 2.5 million pounds, the BoE said.

Regulators are under pressure from industry and some lawmakers to ease rules on banks to maintain the City of London as a global financial centre after being cut off from the European Union by Brexit.

The BoE said its proposals were in line with a requirement to have regard to competitiveness as they reinforce market resilience.

“This would help to ensure that the UK remains an attractive domicile for internationally active financial institutions, and that London retains its position as a leading international financial centre,” the BoE said.

($1 = 0.7339 pounds) (Editing by Mark Heinrich)



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How banks in Europe are managing bad loans, BFSI News, ET BFSI

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Credit crunch was beginning to become a major problem for banks in Europe, however, they seem to have found a way to tackle the issue.

Non-performing assets in European banks were piling up due to COVID-19. As of the second quarter of 2020, the NPA ratio for all banks in the region was at 2.8%, up 0.2 percentage points from a year ago.

According to reports, banks set aside lower provisions for potential loan losses in the second quarter of 2021, with UK banks booking significant reversals. Booking reversals here means that overall funds that accounted for bad loans shrank, making risk from bad loans manageable, according to analysts.

According to data by S&P Global Market Intelligence, 12 of the 25 largest banks in Europe booked reversals, and loan loss provisions have been put aside to cover potential costs arising from defaulting loans.

Of the 12 — Barclays PLC, NatWest Group PLC, Lloyds Banking Group PLC, HSBC Holdings PLC and Standard Chartered PLC — are based in the UK, with Barclays releasing the highest amount of 911 million euros, according to their data.

So far, banks have not seen a surge in bad loans. However, with talks of central banks moving towards tapering COVID-19 support, the market expects deterioration in asset quality.

This is likely to be more visible in 2022 and will happen gradually rather than suddenly since the measures will not end all at once, DBRS’ Rivas told S&P Global.

If banks do need top-up provisions due to additional bad loans in pandemic-affected sectors, the risks would likely be against earnings rather than capital, said S&P Global Ratings’ Edwards.

Click here to read more stories on banking



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Bank of England urges banks to wait out EU pressure over euro clearing, BFSI News, ET BFSI

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Banks should hold their nerve in the face of European Union pressure to shift euro derivatives clearing from London to the bloc, Bank of England Governor Andrew Bailey said on Tuesday.

Since Britain fully left the EU last December, the bloc has asked banks to move euro clearing from London, which accounts for the bulk of activity, to Frankfurt.

So far, banks and their customers have put on a united front against relocating clearing, saying it would bump up costs by splitting markets.

Bailey said banks were waiting rather than shifting euro positions as a June 2022 deadline looms when temporary permission for London clearers to serve EU customers ends.

“The right thing to do is to wait for the moment. The cost of moving and fragmenting are too large,” Bailey told a Bloomberg event.

“While waiting is sensible from the point of view of the banks, it puts the responsibility on the authorities to sort the thing out,” Bailey said.

However, negotiations with the EU at the present time have not been particularly intense, but the BoE was happy to give EU regulators the assurances they need, he said.

“If they want to take a decision to break the system up, then it’s important to consider the risks to financial stability that come with fragmentation.”

Clearers in the United States already have EU permission to serve customers in the bloc.

“We could see some clearing of euro instruments switch to New York from London if this does not get sorted out,” NatWest bank chairman Howard Davies told the same event.



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EU supervisors call for implementation of global banking rules, BFSI News, ET BFSI

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A group of bank supervisors from across the European Union called on Tuesday for the bloc to implement global banking rules agreed to prevent a repeat of the global financial crisis.

In an open letter to the European Commission, nearly two dozens central banks and regulators defended the Basel III rules, which have been the object of intense lobbying from a banking industry keen to reduce its capital requirements.

“We, as prudential supervisors and central banks in the EU, very much support a full, timely and consistent implementation of all aspects of this framework,” the signatories said.

“The pandemic shows that more resilient banks are better able to support the real economy, even during times of crisis.”

The signatories came out in defence of the “output floor”, which limits banks’ discretion in setting their own capital requirements and of a standardised approach to credit risk, while adding that EU-specific deviations should be minimised.

Signatories included institutions from all large EU countries with the exception of France. (Reporting By Francesco Canepa Editing by Balazs Koranyi)



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Apple hit with antitrust case in India over in-app payments issues, BFSI News, ET BFSI

Personal Finance

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NEW DELHI – Apple Inc is facing an antitrust challenge in India for allegedly abusing its dominant position in the apps market by forcing developers to use its proprietary in-app purchase system, according to a source and documents seen by Reuters.

The allegations are similar to a case Apple faces in the European Union, where regulators last year started an investigation into Apple’s imposition of an in-app fee of 30% for distribution of paid digital content and other restrictions.

The Indian case was filed by a little-known, non-profit group which argues Apple’s fee of up to 30% hurts competition by raising costs for app developers and customers, while also acting as a barrier to market entry.

“The existence of the 30% commission means that some app developers will never make it to the market … This could also result in consumer harm,” said the filing, which has been seen by Reuters.

Unlike Indian court cases, filings and details of cases reviewed by the Competition Commission of India (CCI) are not made public. Apple and the CCI did not respond to a request for comment.

In the coming weeks, the CCI will review the case and could order its investigations arm to conduct a wider probe, or dismiss it altogether if it finds no merit in it, said a source familiar with the matter.

“There are high chances that an investigation can be ordered, also because the EU has been probing this,” said the person, who declined to be identified as the case details are not public.

The complainant, non-profit “Together We Fight Society” which is based in India’s western state of Rajasthan, told Reuters in a statement it filed the case in the interest of protecting Indian consumers and startups.

In India, though Apple’s iOS powered just about 2% of 520 million smartphones by end-2020 – with the rest using Android – Counterpoint Research says the U.S. firm’s smartphone base in the country has more than doubled in the last five years.

The Apple case in India comes just as South Korea’s parliament this week approved a bill that bans major app store operators like Alphabet Inc’s Google and Apple from forcing software developers to use their payment systems.

“MIDDLEMAN IN TRANSACTIONS”

Companies like Apple and Google say their fee covers the security and marketing benefits their app stores provide, but many companies disagree.

Last year, after Indian startups publicly voiced concern over a similar in-app payments fee charged by Google, the CCI ordered an investigation into it as part of a broader antitrust probe into the company. That investigation is ongoing.

The India antitrust case against Apple also alleges that its restrictions on how developers communicate with users to offer payment solutions are anti-competitive, and also hurt the country’s payment processors who offer services at lower charges in the range of 1-5%.

Apple has hurt competitors by restricting developers from informing users of alternative purchasing possibilities, thereby harming “app developers’ relationship with their customers by inserting itself as middleman in every in-app transaction,” the filing added.

In recent weeks, Apple has loosened some of the restrictions for developers globally, like allowing them to use communications – such as email – to share information about payment alternatives outside of their iOS app.

And on Wednesday, it said it would allow some apps to provide customers an in-app link to bypass Apple’s purchase system, though the U.S. firm retained a ban on allowing other forms of payment options inside apps.

Gautam Shahi, a competition law partner at Indian law firm Dua Associates, said that even if companies change their behaviour after an antitrust case in filed, the CCI still looks at past conduct.

“The CCI will look at recent years to see if the law was violated and if consumers and competition were harmed,” said Shahi.

The CCI has plans to speed up all cases involving big technology firms such as Amazon and Google by deploying additional officers and working to more stringent internal deadlines.



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Banks in EU “window dress” to escape higher capital charges, says BIS paper, BFSI News, ET BFSI

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LONDON: Some of the European Union‘s biggest banks are holding less capital than they should by using transactions to temporarily compress their balance sheets, a research paper from the Bank for International Settlements said on Thursday.

After several banks had to be rescued by taxpayers during the global financial crisis over a decade ago, global regulators now designate the biggest among them as globally systemic banks or G-SIBs to face tougher capital rules.

Each year, G-SIBs are slotted into buckets, with tougher rules for those in the higher buckets.

The paper from the BIS, a forum for central banks based in Basel, Switzerland, said “window dressing” or using transactions to compress assets and liabilities at the end of the year, is blurring data used by regulators and thus affecting the actions they take.

The volume and riskiness of assets and liabilities determine how much capital must be held, but banks are able to “manage down” their G-SIB score and reduce their capital surcharges, the paper said.

“Up to 13 banks in the EU would have faced more intense supervision and higher capital requirements in the absence of window dressing,” the paper said, without naming them.

“Of these, three banks would have been added to the G-SIB list, whereas 10 banks would have been allocated to a higher G-SIB bucket in at least one year,” the paper added.

Window dressing has long been a bugbear of regulators, but the paper from the BIS suggests that regulators should be taking a more granular approach to designating G-SIBs, which affect the stability of the financial system.

“Our findings underscore the importance of supervisory judgement in the assessment of G-SIBs and call for greater use of average as opposed to point-in-time data to measure banks’ systemic importance,” the paper said. (Reporting by Huw Jones)



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BIS, BFSI News, ET BFSI

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By Marc Jones

LONDON: Central banks and financial regulators urgently need to get to grips with the growing influence of ‘Big Tech‘, according to top officials from central bank umbrella group the Bank for International Settlements (BIS).

Global watchdogs are increasingly wary that the huge amounts of data controlled by groups such as Facebook, Google, Amazon and Alibaba could allow them to reshape finance so rapidly that it destabilises entire banking systems.

The BIS, in a paper led by its head Agustin Carstens, pointed to examples such as China where the two big tech payment firms Alipay and WeChat Pay now account for 94% of the mobile payments market.

China has already rattled its markets with a series of clampdowns https://www.reuters.com/world/china/no-gain-without-pain-why-chinas-reform-push-must-hurt-investors-2021-07-28 on top tech and e-commerce firms. Last November regulators torpedoed the public listing of Jack Ma’s fintech Ant Group and in the nine months since other tech giants and, lately, tutoring firms, have all faced scrutiny.

In many other jurisdictions too, tech firms are rapidly establishing footprints, with some also lending to individuals and small businesses as well as offering insurance and wealth management services.

“The entry of big techs into financial services gives rise to new challenges surrounding the concentration of market power and data governance,” the BIS paper https://www.bis.org/publ/bisbull45.pdf published on Monday said.

There was scope for “specific entity-based rules” notably in the European Union, China and the United States, it added.

“Any impact on the integrity of the monetary system arising from the emergence of dominant platforms ought to be a key concern for the central bank.”

Stablecoins – cryptocurrencies pegged to existing currencies such as Facebook’s Diem – and other Big Tech initiatives could be “a game changer” for the monetary system, the paper added, if the “network effects” of social media and e-commerce platforms turbo-charged their uptake.

It could lead to a fragmentation of existing payment infrastructures to the detriment of the public good. “Given the potential for rapid change, the absence of currently dominant platforms should not be a source of comfort for central banks,” the paper said.

It said they should anticipate developments and formulate policy based on possible scenarios where Big Tech initiatives are already reshaping payments and other parts of financial systems.

“Central banks and financial regulators should invest with urgency in monitoring and understanding these developments” it added. “In this way, they can be prepared to act quickly when needed.”



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