New global banking regulations agreed in September could hit economic growth and put European banks at a disadvantage, European Central Bank Governing Council member Yves Mersch said on Sunday. Mersch, who heads the central bank of Luxembourg, also criticised plans for new European budget rules, saying they did not go far enough and that the European Parliament should tighten them.
"As the real economy is mainly financed by the banking system, financing conditions for companies without access to the capital markets would tighten and trigger a negative impact on economic growth," he said of the new rules. The new Basel III requirements will force banks to hold top-quality capital totalling 7 percent of their risk-bearing assets, more than triple what they do now.
The capital levels are significantly lower than what banks feared and lenders will have until January 2019 to comply with some of the rules. But the biggest international banks still face a capital surcharge on top of Basel III rules, to tackle concerns that banks deemed "too big to fail" may take risks that could derail the financial system.
Mersch said the higher capital ratio for the biggest banks would hit large banks in Europe disproportionately, even though they are not inherently more risky. "The additional ratio for systemically important financial institutions (SIFIs) can be questioned in so far as it sanctions the traditionally larger banks of continental Europe," Mersch said in the text of a speech given in Istanbul.
"Such large banks are unpopular in the US - without being necessarily more risky." He said European banks would be hit harder than those in the United States.
"The new rules lead to comparative disadvantages to the European banking system," Mersch said. "The US banks rely more on fees than on deposits. The global playing field will be tilted." There was also a risk that banks involved in all aspects of banking would be pushed into riskier activities when the margins of lending to smaller and medium-sized firms were diminishing due to regulatory requirements, he said.
Mersch called on the European Parliament to tighten the rules governing budget deficits within the European Union, saying automated sanctions should be implemented for those breaching the rules. "It is to be hoped that the European Parliament will revert to an automatic sanction mechanism," Mersch said.
"Indeed, it should be possible to start with some sanctions even before a country breaches the 3 percent of GDP rule, thus strengthening the pre-emptive side of the framework."