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High output floor threatens bank-financed EU economy

High output floor threatens bank-financed EU economy
​​​​​​A stat​ement by ESBG around Basel reform and output floors

>> See ESBG overall position on Basel reform

​BRUSSELS, 14 December 2016​

The so-called output floor, a main element awaiting decision in negotiations on finalising Basel III, is downright dangerous for European banks. It’s too much medicine for the cure and would hurt some regional economies and some banks’ business models.

Costs would rise for loans originating from banks that use internal models. That would likely hamper the number of loans granted to both households and businesses of all shapes and sizes. It would be an untimely blow to a European economy largely bank-funded and where a great many banks use internal models.

​Final compromises by the Group of Governors and Heads of Supervision on 8 January around proposed regulatory reforms – possibly including an output floor – should bring the Basel reform process to an end. Before then, we continue to stress that imposing a standardised floor for all credit institutions, regardless of their business model, would be unwise. Any floor above 60%, which is one of the figures currently circulating, would increase capital requirements of European banks significantly.

Financing the economy and providing liquidity to the markets in Europe is best led by banks. Their lead role is irreplaceable.

Beyond Europe’s borders, Basel decisions deemed unbalanced would disrupt an already fragile global level playing field.

Apart from that, loan splitting should be allowed in the revised standardised approach for credit risk. Internal models for specialised lending should be kept too, as they represent massive money flow and relate to key infrastructure and commodities that could not easily be financed otherwise.​

>> See ESBG overall position on Basel reform

Basel III; European Institutions; European Supervisory Authorities (EBA-ESMA)