Association comments on the EU's review of the Capital Requirements Directive (CRD)
Association of German Banks: Use amended supervisory rules to prevent financial crises

01 October 2008 - The European Commission today presented its review of the Capital Requirements Directive, which it has spent two years preparing, to the European Parliament and the Council for consideration.

“The private banks welcome the revised Capital Requirements Directive. The proposed amendments are largely appropriate,” Hans-Joachim Massenberg, Deputy General Manager of the Association of German Banks, said today in Berlin. For one thing, outdated rules – like those on large exposures and the definition of capital – would be adapted to take account of current developments. For another, the principles-based rules on defining capital would allow practice-oriented and risk-adequate implementation in the individual EU member states. Finally, supervisory loopholes exposed by the financial crisis would be plugged at the same time.

Mr Massenberg welcomed it that the new rules removed weaknesses of the old ones: “Besides some technical changes, the CRD will in particular improve the framework for cooperation between European banking supervisors.” The European Commission's proposals to enhance the quality of securitisations by ensuring adequate risk management processes also basically went in the right direction. “Overall, the proposed amendments of the CRD are likely to also limit the threat of future financial market crises,” Mr Massenberg added.

At the same time, Mr Massenberg criticised some points where he felt the new rules were overshooting the mark. For example, the Association of German Banks rejects the Commission's plans to require banks to retain a share of the risk in future also after securitising loans. “As the Association of German Banks sees it, a mandatory requirement to retain part of the risk exposure will not remove the weaknesses in risk management identified in the wake of the subprime crisis. Such a requirement would unnecessarily make loans more expensive, without significantly improving the risk situation,” Mr Massenberg pointed out. Securitisations were an important tool for ensuring corporate financing, and would also remain so in the future.

Mr Massenberg strongly welcomed the Commission's proposal to organise cross-border cooperation between banking supervisors overseeing international banking groups in so-called colleges of supervisors. “The proposed strengthened role of the responsible consolidating supervisor with wide-ranging process management powers is urgently required,” Mr Massenberg said. “This is the only way to improve supervision of cross-border banking groups and adapt it to the growing integration of the financial markets in the EU.”

The Commission's proposal to revise the large exposure regulations in the area of interbank lending would, on the other hand, only aggravate crises. This would further restrict the supply of liquidity between banks that was difficult in any case in tense market situations.
Mr Massenberg therefore made clear: “The Association of German Banks rejects the proposal to limit interbank exposures to 25 % of own funds without providing for exemptions to facilitate the supply of liquidity.” On the other hand, the Association explicitly welcomed the proposed alternative threshold of € 150 million, which could be used particularly by smaller banks.

In all areas addressed by the new CRD the rule should be that European banks must not be put at a disadvantage compared with competitors in non-EU countries. To avoid such a distortion of competition, changes to the legal framework would therefore have to be agreed uniformly at international level.