Exclusive-France pitches scrapping some capital demands on top euro zone banks

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By Francesco Canepa

FRANKFURT (Reuters) -France is pushing to scrap some capital requirements on the euro zone’s top lenders to put them on an equal footing with their U.S. rivals, according to a document seen by Reuters.

The proposal by French regulators would apply to the bloc’s seven globally significant banks, four of which are French, and to other credit institutions with a balance sheet of more than 100 billion euros ($117 billion).

Under the plan, which hasn’t previously been reported, Europe’s biggest banks would be subject to a single requirement, rather than the current two, for determining how much capital they must have to absorb losses if they fail.

These requirements were introduced around a decade ago to avoid a repeat of the global financial crisis of 2008 but they are now being reviewed as part of a U.S.-led drive towards deregulation that has gained momentum under President Donald Trump.

ECB TO CONSIDER PROPOSALS

The four-page document from France, which was recently submitted to a European Central Bank task-force dedicated to simplifying bank rules, reflects concerns that U.S. banks have it easier. 

The proposal aims to streamline requirements rather than lower them — which would potentially allow banks to lend more but also make them more vulnerable. It may, however, result in lower demands on some banks.

“A more straightforward framework for LAC (loss-absorbing capacity) ratios could be valuable for both regulators and market participants,” the Bank of France and French Prudential Supervision and Resolution Authority said in what they called a “non-paper”.

“In comparison, the U.S. framework is considerably simpler,” they added.

The ECB’s task-force will consider this and other proposals before making its own recommendations to the European Commission by the end of the year. This is part of the Commission’s broader simplification initiative. 

Supervisory sources said France’s plan appeared to be tailored for the French banking sector, which is dominated by six large banks, and may encounter resistance from other countries.

Germany, where regional and smaller lenders still make up nearly half of the total, made its own proposal earlier this year, calling for an easier regime for those types of banks.

An ECB spokesperson declined to comment. Spokespeople for the Bank of France and the Prudential Supervision and Resolution Authority did not immediately provide a comment.

ECB vice-president Luis de Guindos hinted last week at reducing the number of capital buffers in the EU. 

In the United States, regulators are poised to unveil a broader overhaul of capital rules aimed at making them more industry-friendly. U.S. banks are already subject to less stringent requirements, for example in terms of liquidity.

FRANCE PROPOSES SINGLE CAPITAL REQUIREMENT

The French plan calls for the creation of a “single risk-based requirement” merging a worldwide standard known as Total Loss-Absorption Capacity, or TLAC, and Europe’s own Minimum Requirement for own Funds and Eligible Liabilities (MREL).    

TLAC is currently only applied to globally systemic banks, which also have to comply with MREL like all large lenders in the 21 countries that form the EU’s Banking Union.

French central bank governor Francois Villeroy de Galhau said earlier this year the coexistence of MREL and TLAC was “a clear case of gold-plating and complexity”. 

While these two requirements are not fully comparable, MREL is generally higher.

For example, the euro zone’s biggest lender, France’s BNP Paribas, is required to have a total MREL buffer equal to 27.03% of its risky assets, compared to just 22.84% under TLAC.

A 2024 study by the Banque de France found that the average MREL binding requirements for globally systemic banks in the EU were about 3.5 percentage points higher than the average TLAC applying to their U.S. peers.

French regulators said in the non-paper their proposal should avoid “a general tightening” of requirements compared to now and aim to be neutral.    

They also advocated using TLAC, rather than MREL, rules for deciding what proportion of a bank’s liabilities must be subordinated, or eligible to take losses in a resolution.

Finally, the resolution authority, which for the biggest banks is the EU’s Single Resolution Board, should be able to set “bank-specific” requirements if needed.

TLAC and MREL are just two of the sets of requirements that banks have to respect. Others include a leverage ratio, which measures a bank’s capital against its total assets, of at least 3%. 

($1 = 0.8535 euros)

(Editing by Toby Chopra)