The Transposition of the Basel III Rules into European Law

"Basel III is an international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand. Begun in 2009, it is still being implemented as of 2022." [1]

No one can dispute the importance of appropriate prudential rules to ensure the stability of the banking system and to protect against systemic risks. However, as the 18th century French philosopher Voltaire observed: “The best is the enemy of the good”. It is important, therefore, to ensure that the adoption of such rules by the European Union does not penalise European companies and banks. This is what is at stake and we must pay close attention to the issue.

Transposition but not at any price

The European Commission (EC) is planning to transpose into European law the agreements adopted by the Basel Committee (i.e., Basel III – B3) dating from December 2017. Some measures raise concerns for banks and their corporate clients, that is, the ‘real economy’.

The impacts could be both direct and indirect and penalise European companies, thus imposing a competitive disadvantage. This is, however, certainly not the EU's goal. But we can examine a few points where this transcription could be negative for European business. These include the financing of non-listed companies or SMEs, trade finance and the cost of. For example, trade finance and the issuance of advance payment guarantees, or performance bonds, would be subject to a risk conversion factor of 50% instead of 20%. The change in weighting would affect the debt capacity and the costs of issued guarantees. More expensive guarantees would affect the profit margins of European companies and their competitiveness, or their ability to bid for private or public contracts. Moreover, the obligation imposed on European banks alone to provision their non-performing loans after four to eight years, even when they benefit from a guarantee or credit insurance issued by a quality issuer, such as the state or credit insurance. This is likely to call into question or reduce their participation in certain operations that are deemed to be riskier such as the financing of long-term export contracts. Imposing regulatory provisions when a bank has no prospect of defaulted credit losses, and no accounting provisions, are required seems absurd.

The laudable intention

We can all welcome the EC’s efforts to faithfully implement the international Basel III rules while considering the potential specificities and features of EU banking sector. Obviously, it is important that the amendments to the capital requirements regulation strengthen the resilience of the banking sector without resulting in significant increases in those specific requirements. The treasury community and the real economy at large support the idea of financial market stability, which is fundamental for the whole EU economy. We don’t want to adopt rules that would result in a competitive disadvantage for EU banks compared with their international peers. And similarly, we do not want to have such disadvantages compared to our peers outside the Union. The previous changes in capital requirements have restored the confidence in banks and, as a consequence, made them more resilient. After a long period of pandemic uncertainty, it is essential that banks are able to fulfil their functions and not come under further pressure. The economy must improve and banks must respond positively to corporate’s funding requirements. The ‘greenification’ of the economy and corporate digitisation plans will require huge investments by European businesses and these investments will certainly be financed by banks both within and outside the European Union (EU). Therefore, corporates may be concerned about additional tightening prudential rules that could cause funding issues. The rules, whatever their aims, should not penalise corporations with additional financing costs or discourage hedging due of cost increases. SMEs and those that are non-rated should not be penalised, either.

Other potential drawbacks

The EC has proposed to maintain the credit value adjustment (CVA) exemption. With current provisions, the regulator recognised specificities of non-financial companies and why they need to use derivatives to mitigate risks. The uncollateralised exposures to derivatives with Non-Financial Counterparties (NFC) used for hedging purposes are exempted from the own fund’s requirements for CVA risks. We treasurers fought for this exception. Without being too technical, the removal of the alpha multiplier for banks using internal models is welcomed by banks, but it is only granted until 2029. It won’t be applied to banks using the standard model. The risk for end-users and the real economy is the gradual increase in hedging costs. Circa 80% of corporates in Europe are not rated by agencies and draw the largest part of their indebtedness from banks using internal models to determine their risks. The standardised approach to measuring risks is severe under B3. The output-floor would lead to an important increase of capital requirements, even if the EC proposed to temporarily limit these increases. The recourse to rating agencies could also be reconsidered and supported by other types of ratings from other sources. Eventually, as aforementioned, trade finance, among other areas, is just one that could be hit. It is planned to use 50% in credit conversion factors instead of 20%. The proposed unfavourable treatment of off-balance sheet items (i.e., unconditionally cancellable commitments – UCCs) is also underlined. The proposed provisions could result in a deterioration in conditions for export companies in Europe.


This area is highly technical and seems apply to banks more than any other type of corporate. However, prudential rules may have huge and undesired indirect impacts on businesses. Corporates are, in general, in favour of rules that aim to reinforce the system and maintaining the solidity of banks. However, implementing the B3 agreement should not put our real economy at a competitive disadvantage. These useful prudential rules should strike the appropriate balance between financial stability guarantee and the necessary support to companies’ funding needs.

We are facing a recovery period and a digital transformation, both of which will require massive injections of finance from banks because, in Europe, bank funding remains more important compared with capital market financing.

It is essential, as always with such key rules, to properly assess the potential impacts for non-financial companies to avoid too stringent rules that could become counterproductive..

François Masquelier, Chair of ATEL - 2022

* Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (EACT).

[1] Investopedia


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