Finance ministers of the European Union member countries reached an agreement on Friday on reforming bank capital rules, a major step towards boosting the bloc’s financial stability and a stepping stone towards a deal on a backstop for its bank-rescue reserve fund in June.
The accord came after 18 months of heated debate among the 28 EU governments on how to apply new global bank capital rules that overhauled financial regulations after the 2007-2009 global crisis.
It paves the way for another breakthrough on the bloc’s bank rescue fund, which ministers committed on Friday to equip with a backstop, although the final decision will be made only in June.
The two measures are seen as interlinked because the banking capital rules are expected to reduce bank risk, which would allow more sharing of risk among euro zone countries in the form of a common backstop to prop up the sector’s rescue facility, known as Single Resolution Fund.
Germany’s Finance Minister Olaf Scholz said after the meeting that the deal was a good start that would provide momentum towards further progress in the area.
Under the accord, which must be approved by EU lawmakers, European banks will have to abide by a new set of requirements aimed at keeping their lending in check and ensuring they have stable funding sources.
Germany and France fully backed the deal, others accepted it with some reservations. Italy and Greece, which abstained, said the deal on capital rules should be matched by an agreement on sharing banking risk by June.
Italy’s position, although in line with past statements, was partly dictated by the fact that it has yet to form a government after inconclusive elections in March.
Under the deal, the euro zone’s agency for troubled banks, the Single Resolution Board, will be given a clearer mandate to set the level of capital buffers that banks should hold against the risk of failure.
The so-called Minimum Requirement for own funds and Eligible Liabilities (MREL), which introduces into EU legislation the global standard known as Total Loss Absorbing Capacity (TLAC), will be set at 8 percent of large banks’ total liabilities and own funds.
The SRB will, however, be able to require higher buffers for banks it deems insufficiently safe, or a lower buffer for better capitalised institutions.
Ministers agreed on a more favourable capital treatment for large banks in countries that belong to the bloc’s banking union, such as France’s BNP Paribas , Netherlands’ ING and Italy’s Unicredit, as their exposure to other countries in the bloc will be treated as a safer domestic exposure.
The agreement “will allow our banks to better finance households and firms in France and in Europe,” the French Finance Minister Bruno Le Maire said.
However, Britain’s finance minister Philip Hammond and ministers from smaller EU states said that departure from global standards could heighten risk.
The new rules would also require large foreign banks to set up intermediate parent undertakings (IPUs) that would bring their EU operations under a single holding company. The move effectively mirrors U.S. rules and is seen as crucial to protecting the bloc’s financial stability against risks posed by major banks.
In a minor concession to reluctant states, ministers reiterated their intent to reach an agreement on a state-funded backstop for the euro zone’s bank-funded Single Resolution Fund.
The fund is currently equipped with 17 billion euros ($19.9 billion), but that is not considered enough to cope with a larger banking crisis.
The backstop is expected to be provided by the euro zone’s state-backed bailout fund, the European Stability Mechanism.
Another measure of risk sharing, a common insurance of covered bank deposits, is still far from being agreed, despite being a pillar of the banking union, the EU’s flagship project to strengthen its banking sector after years of crisis.