Daily Management Review

Wall Street Lenders could be Hit by New Plans for Bank Reform in Europe


Wall Street Lenders could be Hit by New Plans for Bank Reform in Europe
The balance sheets of banks, that are already facing a challenging environment of low interest rates, could potentially come under pressure as the European Commission has unveiled a new set of proposals aimed at banks operating in the European Union (EU).
The implementation of a caveat that is designed to deal with the "too-big-to-fail" problem at an international level is the key aspect of the proposed reforms which were released on Wednesday. This part of the proposals is expected to tackle risks linked to globally and systemically important banks and is known as the total loss-absorbing capacity (TLAC).
In order to safeguard financial stability and public funds, it would require banks to hold sufficient amounts of readily liquid capital. Wall Street banks as well as other non-EU banks which have operations in the region could be affected by this rule.
Up to 13 banking groups would have to comply with the TLAC standard in the EU, said European Commission Vice President Valdis Dombrovskis in a speech earlier this month. U.S. banks that top the list of Globally Systemically Important Banks (G-SIBs) would have a big impact because of this. At the top of global regulators' list of systemically important banks replacing HSBC are Citi joined JP Morgan. To help preserve financial stability, 16 percent of risk-weighted assets (RWAs) from 2019 will have to be held by these U.S. banks operating in the region, under the proposals.
However, as the U.K.'s Brexit negotiations with the European Union progress, this could, however, become more challenging. In the future, for operating in the U.K. and in the European Union once Britain formally leaves the EU, banks may be expected to hold additional liquidity pools.
With low or even negative interest rates adding pressure on their profitability, banks across the globe are operating in a tough environment. Meanwhile, the long-term strategies for financial institutions operating in the EU are being impacted by the uncertainty around Brexit.
Adding a few extra levels of regulatory requirements to ensure banks are not dependent on taxpayers' money in times of crisis on existing EU banking rules formed the basis of the comprehensive set of plans, aimed at further strengthening the resilience of EU banks. The Commission’s proposals needs to be approved by heads of state from each member country and could be ratified by the European Parliament as the Commission is the legislative arm of the EU.
"Europe needs a strong and diverse banking sector to finance the economy. We need bank lending for companies to invest, remain competitive and sell into bigger markets and for households to plan ahead. Today, we have put forward new risk reduction proposals that build on the agreed global standards while taking into account the specificities of the European banking sector," Dombrovskis, responsible for financial stability, financial services and the capital markets union, said in a press statement on Wednesday.
The Capital Requirements Regulation (CRR) and Directive (CRD), which were adopted in 2013 and spell out the required capital that financial institutions should hold in their reserves, are aimed to be amended by the proposal.