Irish banks will not be penalised by new EU reforms, says McGuinness

Irish banks will not be unduly affected by new draft European Union laws designed to implement the final piece of the Basel III reforms to solidify the sector by requiring greater capital reserves, Ireland's commissioner, Mairéad McGuinness, has said.

The financial services chief unveiled the proposed batch of rules on Wednesday, the last part of a drive begun in the wake of the global financial crisis to bolster the resilience of the banking sector and prevent a repeat of the crash and the public bailouts it forced of financial institutions.

“It’s the final piece of the jigsaw to strengthen the banking sector. We saw what happened in the financial crisis – when we had weak supervision, we had weak regulation,” Ms McGuinness said.

"While banks may not welcome the entirety of the package, I think there is an understanding that, for the long-term strength of the banking sector in Europe. they do need to implement this piece."

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Earlier this year the Banking and Payments Federation Ireland expressed concerns that the new rules could affect Irish banks excessively as they already hold more capital due to the legacy State investment from the crash, and may result in "trapping of capital" within banking groups, something that is blamed by the industry for higher interest rates.

But Ms McGuinness said she did not share this view. If some banks had higher capitals reserves already, this should be taken into account.

“Because of past experiences with mortgages, there are higher capital requirements on Irish banks. Now while we don’t identify and work on each bank or each member state, I think that the concerns which were expressed in February may not come to pass,” Ms McGuinness said.

“If the banks already have a higher capital requirement, then that should be taken account of, as and if there is a requirement to go further,” she added. “So I don’t quite share the concerns of the banking federation that they will suffer more.”

Capital reserves

Previous rounds of banking reform have brought the capital reserves of banks in Europe up to roughly three times what they had been in the run-up to the financial crisis of 2007-2009.

The new rules were required because “taxpayers were carrying a burden”, Ms McGuinness said. “We’ve gone a long way to strengthening the banks. The Covid crisis has identified that they are stronger, and this is the last piece.”

The rules will lead to an increase in banks' capital requirements of 9 per cent on average, according to the European Commission. The changes are to be rolled out from 2025, and will be phased in to assuage the concerns of banks that tightening capital requirements will restrain lending that could help economies recover from the pandemic.

The package must be approved by the European Parliament in order to be finalised, and some negotiation and tweaks may lay ahead.

The reforms place limits on the internal models that banks can use to calculate capital reserve requirements in a bid “to constrain the ability of banks to excessively reduce capital requirements when using internal models”, the commission has said. It will make risk-based capital ratios more comparable across banks.

The draft laws also introduce stress testing and rules for how banks should disclose environmental, social and governance (ESG) risks, and harmonise the regulation of branches of foreign banks in the EU.