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French plot revolt over new European rules for failing banks

Paris fears its banks will be disproportionately hit by new European rules for failing banks

France is preparing to mount a campaign against the way Europe introduces rules making it easier to wind down failing banks, driven by fears in Paris that its lenders will be disproportionately targeted.

The European Commission is planning to publish proposals in the coming weeks. They seek to stop major banks being too-big-to-fail by forcing them to issue more debt that can be easily wiped out if they get into distress. It is estimated that banks will have to issue billions in new securities to meet the standard.

According to people briefed on the matter, France is preparing to fight the plans over what is says is their overly narrow scope. As drafted the rules would cover a total of 13 EU lenders, including France’s BNP Paribas, Société Générale, Crédit Agricole and Groupe BPCE, more than any other nation other than the UK.

Other banks set to be captured include Deutsche Bank in Germany, UniCredit in Italy and Banco Santander in Spain.

The logic behind the rules is that wiping out or converting the debt would give a boost to the bank’s crumbling financial position, protecting deposits and taxpayers and giving regulators time to act. At the same time, banks warn that they will incur serious costs, as investors will want an attractive return on the bonds to compensate them for the extra risks they are running.

The planned measures mirror an international deal struck in 2015 by banking regulators from the world’s major economies. That agreement foresees that the rule, known as total loss absorbing capacity, or TLAC, would cover banks identified as being systemically important to the global economy. The standard is set to fully apply from January 2022.

According to the latest data from the Financial Stability Board, the global regulatory group that drew up the rule, as many as 30 banks will have to comply with the standard internationally.

Despite the scope of the rules being decided at international level, EU officials have been debating for months whether to apply the standard to a wider set of institutions in Europe, on the basis that smaller lenders can also potentially pose a systemic risk.

The decision to stick with the global approach has infuriated France, according to diplomats, which argues that it should not become a prime target for EU regulation simply because it has a highly-consolidated banking sector.

Elke König, the chairwoman of the Single Resolution Board, the euro area agency tasked with handling failed banks in the future, has also suggested that a wider range of banks should be covered by the rule. She said there was a case to be made for applying TLAC “to a larger pool — it could be all significant banks.”

The clash has echoes of a French pushback over the past two years against EU plans for breaking up big banks, with Paris concerned then that it would become the prime target. Work on those proposals has ground to a halt because of splits within the European Parliament — including over how many banks should be covered.

It is also the latest furore among governments over how to strengthen the financial system, at a time when Europe is in the middle of a spat with the US over a different set of international discussions on banking reform.

According to diplomats, the scope of the proposal is set to be one of the major topics for discussion on the plans, which will need approval by the European Parliament and the Council — the EU institution which represents national governments — if they are to become law. Paris is one of several capitals to have identified it as an issue requiring further review.

Europe’s roll out of the TLAC rule has been complicated by the fact that, when the international standard was agreed, the EU was already rolling out its own set of rules, also aimed at ensuring that banks issue enough loss absorbing debt.

Whereas the EU standard, known as MREL, leaves it to national and euro area regulators to decide the amount of loss-absorbing securities each bank needs, TLAC is a fixed rule: by January 2022, banks should have outstanding subordinated debt, and other eligible securities, equivalent to 6.75 per cent of their total assets, and 18 per cent of their assets weighted for risk. The rule starts phasing in from 2019.

According to EU officials, the existence of the MREL rule reduces the case for extending TLAC to a wider group of banks, at a time when regulators need to act swiftly if Europe is to meet the international deadline for applying the standard.