The European Union is preparing to introduce a temporary multiplier that would effectively neutralise the capital impact of the Fundamental Review of the Trading Book on banks most exposed to the new global standard, according to EU sources and a Financial Times report published on Tuesday. The move reflects growing anxiety in Brussels that strict implementation of the Basel trading rules could put European lenders at a competitive disadvantage, particularly as the United States and the United Kingdom delay or soften their own approaches to the same reforms.
A THREE-YEAR REPRIEVE IN VIEW
Under the plan being considered, EU policymakers would introduce transitional arrangements that offset the increase in capital requirements stemming from the FRTB framework for as long as three years. The mechanism, described as a temporary multiplier, would allow banks whose trading books face particularly large capital increases under the new methodology to avoid the increase in requirements for up to three years after the rules take effect.
The EU had already pushed back FRTB implementation to 1 January 2027. Brussels plans to adopt the legislation introducing the multiplier after Easter.
COMPETITIVENESS ANXIETY DRIVES POLICY
The FRTB introduces a more risk-sensitive approach to calculating capital requirements for market risk, replacing the current framework with methodology that better captures potential losses under stressed conditions and accounts for the risk of less liquid trading positions. While the reforms are designed to make the global banking system safer, their impact falls unevenly: the European Banking Authority estimates the FRTB could raise market-risk capital requirements by about 30% on average, and by up to 80% for some institutions.
The competitive dimension is central to the EU's hesitation. The United Kingdom has already deferred certain aspects of FRTB implementation until 2028, giving London-based banks additional time to prepare. In the United States, Federal Reserve Vice Chair for Supervision Michelle Bowman previewed a Basel III proposal last week that takes a notably different approach to market risk, with adjustments that better recognise diversification across positions and extend the use of bank internal models where data are sufficiently robust.
GLOBAL COORDINATION FRAYS
The Group of Central Bank Governors and Heads of Supervision, the Basel Committee's oversight body, noted at its 9 March meeting that about 75% of member jurisdictions have implemented, or will shortly implement, the Basel III standards. GHOS members reaffirmed their expectation of full and consistent implementation of the Basel III framework by all member jurisdictions as soon as possible.
The GHOS meeting also endorsed targeted reviews of the Basel framework for banks' crypto asset exposures and the governance and transparency of the assessment methodology for global systemically important banks, with updates expected later this year.
WHAT THIS MEANS FOR BANKS
For European banks with significant trading operations, the temporary multiplier would provide near-term breathing room.
The original Basel III endgame reforms were agreed upon in 2017 and were originally due to take effect from 2022, a date later pushed back to 2023. Nearly a decade later, major jurisdictions are still finalising how to implement them.
European banks have lobbied regulators against imposing requirements that their international competitors do not face, arguing that this would create an uneven playing field. The GHOS, for its part, said recent market developments have highlighted the importance of a prudent global regulatory framework and a regulatory level playing field.
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