December 7, 2023

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*European Commission’s Banking Package 2021 needs to find a proper balance
for better reflecting the specificities of the EU economy and banks*

*In an opinion adopted during its March plenary, the European Economic and
Social Committee (EESC) welcomed the European Commission (EC) proposal to
implement the remaining elements of the Basel III international standards
in the EU. The aim is to strengthen the resilience of the banking sector
while ensuring that it continues to finance economic activity and growth.
But the EESC also calls on the EC to find a proper balance between faithful
implementation, and the need to reflect the specificities of the EU economy
and banks. *

The EESC welcomes the new regulation proposal on prudential requirements
for credit institutions, but says it must strike a balance between ensuring
that EU banks become more resilient, and that the sector is financially
sound and competitive enough to be able to finance the real economy. The
proposal should also enhance the current rules, to continue to prevent
excessive risk-taking, high leverage and speculative behaviours. Periodical
assessments of its actual impact need to be performed. Furthermore, the
Committee welcomes the EC’s approach of strengthening the focus on
Environmental, Social and Governance (ESG) risks, but also the work of the
European Banking Authority (EBA), to properly assess banks’ environmental
risks and their finance strategy for the green transition. Finally, the
EESC asks the EBA to speed up its scrutiny work on the pillar one
framework, and strengthen its efforts to address the shortcomings in the
current ESG disclosures at EU level.

EESC rapporteur *Bogdan Preda* comments:* “The New Banking Package 2021 is
probably one of the most technical and complicated dossiers concerning the
banking industry to have ever been debated at the EESC, aimed at enhancing
the financial market in the EU and thus safeguarding the interests of
European citizens by not exposing them to increased financial risks. As
Rapporteur to this opinion that has been debated in the months before and
during the first week of Russia’s invasion in Ukraine, which is likely to
massively change the European economic landscape especially in terms of
energy deals, I have to say it shall be of particular interest to follow
how EU banks and governments shall be able to cope with the challenge of
preserving market stability, while at the same time implementing the
remaining elements of the Basel III prudential capital requirements”.*

*To strike a balance*

The Committee acknowledges that the EU needs rules to cater for its
challenges (i.e. the recovery, and the green and digital transitions),
specific characteristics (bank credit is by far the main financing channel
for the economy), and ambitions (a Capital Markets Union and the Green
Deal). A faithful but fair implementation of the remaining elements of the
Basel III standards is important to limit the risk of regulatory arbitrage
and to create confidence and predictability for investors and regulators.

On the other hand, it is imperative that European citizens and taxpayers
are not exposed to the increased risks of a financial market crisis.
Financial market stability is a crucial prerequisite for overall economic
stability and is, therefore, in the common public interest. Sound
regulation and surveillance of the banking sector to prevent the threat of
turbulence and crisis is essential, while prudential capital requirements
are instrumental in avoiding the use of public funds for rescuing banks in
distress.

Therefore, the EESC calls on the EC to further evaluate the specific
features of European banks. The Commission must ensure that the legislative
proposals find the proper balance between the implementation of Basel III,
and the need to put forward adjustments to reflect the specificities of
both the EU economy and the EU banks.

In addition, the Committee insists that the new regulation should not only
safeguard financial market stability, but it should also not lead to an
unjustifiable increase in capital requirements for EU banks. The EESC asks
the EC to ensure that the impact on capital requirements, including on
small cooperative banks and small banks, is not too burdensome and so
should not impact their competitiveness, while also taking care to ensure
financial market stability.

*The ESGs*

Financial markets can and should support and enhance the transition to a
more sustainable and greener economy. However, the banking sector cannot
deliver this long-lasting change alone. Industrial policies and the
relevant EU and national legal frameworks should become fully consistent
towards promoting sustainable investment opportunities. They need to
influence the allocation of economic resources in this direction, but also
remove fossil fuel subsidies and reconcile climate objectives with social
needs.

For this reason, the EESC welcomes the strengthening of ESG (Environmental,
Social and Governance) related provisions in legislative proposals. It also
calls on the EC to clarify the applicability of the provisions regarding
the powers of supervisors.

In addition, the EESC welcomes the ESG disclosure work from the European
Banking Authority aimed at properly assessing banks’ environmental risks
and their finance strategy for the transition to a net-zero carbon economy.
The Committee also calls on the EBA to speed up its scrutinising work on
the Pillar One framework, to determine whether it sufficiently captures the
unique features of climate risks.

Finally, the EESC asks the EBA to strengthen its endeavours to address the
shortcomings in the current ESG disclosures at EU level, including on
fossil fuel-related assets and assets subject to chronic and severe climate
change events. The idea is to encourage a substantial increase in the
sustainable finance strategies of banks.

*

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