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A future global financial crisis? Banks are unprepared

2024-09-25 09:39:06Kosova&Bota SHKRUAR NGA REDAKSIA VOX

A future global financial crisis? Banks are unprepared

European policymakers are being urged to make banks more resilient to possible shocks in the event of another financial crisis in the future. In a newly published report, Finance Watch called on policymakers to heed the lessons of the 2008 crash, which, it said, has now "largely faded" from memory.

Among the new challenges, the non-governmental organization (NGO) warned that "global cooperation has increasingly given way to competition". In particular, he highlighted the lack of progress on Basel III, an agreement created after the financial crash to protect against future crises. This complacency, Finance Watch argued, comes despite recent warning signals.

Basel III, published by the Basel Committee on Banking Supervision (BCBS), seeks to ensure that banks have enough cash stashed away for emergencies. Specifically, the agreement increased capital, liquidity and leverage requirements, intended to limit risky banking practices. In its latest report, Finance Watch highlighted the shortcomings of the current framework.

One complaint relates to a regulatory gray area, as the agreement applies to "internationally active" banks - but does not specify more than that. The report also questioned whether Basel III has become "too complex to be effective".

Many institutions seem unsure about the practical use of Combined Buffer Request (CBR), Finance Watch said. The CBR is a capital buffer that banks must maintain on top of their minimum capital requirements. "When banks were encouraged during the Covid-19 pandemic to use their own tampons, a lively debate ensued, revealing much uncertainty about their practical use," the NGO noted.

"It appears that a degree of ambiguity regarding the real nature and purpose of individual buffers in the Basel III framework, and the lack of a clear distinction between structural and cyclical components, may have raised unrealistic expectations as to their utility."

Another major concern relates to banks using their own internal models to calculate risk. While this allows institutions to make risk assessments related to their practices, the flexibility is arguably undermining Basel's goals.

"Finance Watch calls on European policymakers, both at Union and Member State level, to reinforce their commitment to the Basel process and proactively engage with their partners, particularly in the US, to prevent a regulatory "race to the bottom". ", says the Tuesday report from the NGO.

A key proposal relates to the simplification and harmonization of rules, which would ensure a level playing field for internationally active banks around the world. Calls for tighter oversight and airbags, however, face fierce opposition.

Earlier this month, the Federal Reserve scaled back a proposed increase in capital requirements for the largest US banks. A suggested increase of 19% was reduced to 9% in response to industry pressure.

Meanwhile, in the EU, a recent report by former Italian Prime Minister Mario Draghi suggested that the bloc's application of the Basel framework is too restrictive. "The EU has a wide range of prudential rules derived from international standards set by the Basel committees," Draghi noted in the report on European competition.

“Prudent regulation is essential in maintaining financial stability. However, the EU has been accused of 'overreaching' the Basel framework, leading to an overly restrictive and cautious regulatory environment for banks.”

Finance Watch said this final claim is "misleading", arguing that "in reality, the EU is at risk of non-compliance with Basel standards". The UK has similarly watered down plans for the Basel framework in pursuit of growth and competition.

The BoE's Prudential Regulation Authority (PRA) said earlier this month that capital requirements for UK banks would remain "virtually unchanged", with "a total increase of less than 1% from January 2030 when arrangements transitory ends". This is down from a previous suggestion of 3%.


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