EU G-Sibs’ score win is political boost, but no panacea

Carve-out of intra-bloc exposures from BCBS score enshrines banking union, but produces little

The European Banking Union is about to receive a boost from a discreet accord struck between technicians in Switzerland. The Basel Committee on Banking Supervision (BCBS) is set to allow EBU banks to treat intra-bloc exposures as domestic ones, thus generating a parallel systemic risk score that limits the weight of cross-jurisdictional claims and liabilities – two of the 12 components used to determine global systemically important banks. Specifically, EBU banks’ G-Sib bucket allocation will be adjusted to recognise 66% of the score reduction that would be achieved through the intra-bloc treatment.

European officials’ implicit hope is to remove a disincentive to lending across the bloc’s internal borders. But their achievement may produce little material benefit, besides scoring a political point.

For one, 2019’s Capital Requirements Directive V already allows the bloc’s national regulators to allocate banks to a lower G-Sib bucket when warranted, via an alternative scoring methodology that treats EBU exposures as domestic. Ironically, it was the European Banking Authority – which devised the specifics of the alternative methodology – that warned of a potential conflict with the BCBS’s principles. In light of this, the agreement struck in Basel seems aimed more at defusing a potential point of contention than extracting new benefits.

Second, Fitch analysis suggests only a handful of banks already close to escaping to a lower G-Sib bucket would benefit from the domestic exposure treatment. And it’s questionable to what extent they would use their newly freed capital to boost credit supply, as opposed to hiking shareholder distributions or expanding their derivatives book to collect more fees.

Finally, an EBU-unfriendly banking methodology is hardly the main constraint on reducing European banks’ home bias. German or Dutch lenders’ reluctance to buy more Greek, Italian or Portuguese sovereign or corporate debt is largely driven by political considerations, bad memories of the European sovereign debt crisis and – as European Central Bank board member Peter Staedt noted – internal limits set by the banks themselves for exposures to a single country.

European officials’ push for a more favourable treatment of intra-EBU exposures is not, in itself, misguided – and is far less controversial than, say, the European Commission’s vision for Basel III. But with the EBU suffering from far more fundamental, politically charged deficiencies – such as the absence of a bloc-wide deposit insurance scheme – the BCBS’s accommodation comes with a promise, on the EU’s part, to keep the ball rolling, this time among parliamentarians in Strasbourg.