by Francesco Canepa

FRANKFURT (Reuters) – France is pushing to scrap some capital requirements on major euro zone lenders to put them on a level playing field with U.S. rivals, according to a document seen by Reuters.

The French regulators’ proposal would apply to the euro zone’s seven globally significant banks, four of which are French, as well as other credit institutions with balance sheets exceeding 100 billion euros.

According to this project, which had not been made public until now, the largest European banks would be subject to a single requirement, instead of two currently, to determine the amount of capital they must have to absorb their losses in the event of failure.

These requirements were introduced about a decade ago to avoid a repeat of the 2008 global financial crisis, but are now being revisited as part of a U.S.-led deregulatory drive that gained momentum under Donald Trump’s presidency.

ECB EXAMINES PROPOSALS

The four-page document drafted by France, which was recently submitted to a European Central Bank (ECB) working group tasked with simplifying banking rules, reflects concerns that US banks are benefiting from more favorable conditions.

The proposal aims to streamline the requirements rather than relax them, which would allow banks to make more loans but also make them more vulnerable. However, it could lead to a reduction in requirements for certain banks.

“A simpler framework for loss absorbing capacity (LAC) ratios could be useful for both regulators and market participants,” the Bank of France and the Prudential Control and Resolution Authority (ACPR) said in what the two institutions called an “informal document.”

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

The ECB working group will examine this and other proposals before making its own recommendations to the European Commission by the end of the year. This is part of the European Commission’s wider simplification initiative.

According to prudential sources, the French project appears to have been tailor-made for the national banking sector, dominated by six large banks, and could face resistance from other countries.

Germany, where regional and smaller lenders still account for almost half of the total, presented its own proposal earlier this year, calling for a looser regime for such banks.

Spokespeople for the Banque de France, the Prudential Control and Resolution Authority and the ECB declined to comment.

ECB Vice President Luis de Guindos hinted last week that he was considering reducing the number of capital buffers in the EU.

In the United States, regulators are set to unveil a broader overhaul of capital rules aimed at making them more favorable to the sector. American banks are already subject to less strict requirements, for example in terms of liquidity.

FRANCE PROPOSES A SINGLE CAPITAL REQUIREMENT

The French plan envisages the creation of a “single risk-based requirement” merging a global standard known as total loss absorbing capacity (TLAC) and the European minimum requirement for own funds and eligible liabilities (MREL).

TLAC currently only applies to globally systemically important banks, which must also comply with MREL like all major lenders in the 21 countries that make up the EU Banking Union.

Bank of France Governor François Villeroy de Galhau said earlier this year that the coexistence of MREL and TLAC was “a clear case of over-regulation and complexity.”

Although these two requirements are not entirely comparable, the MREL is generally higher.

BNP Paribas, the leading French bank in terms of market capitalization, is thus required to have a total MREL reserve equivalent to 27.03% of its assets at risk, compared to only 22.84% under the TLAC.

A 2024 study by the Bank of France found that the average MREL requirements for global systemically important banks in the EU were around 3.5 percentage points higher than the average TLAC requirements for their US counterparts.

French regulators said in their informal document that their proposal should avoid a “general tightening” of requirements compared to the current situation and aim to be neutral.

They also advocated using the TLAC rules rather than MREL to determine the proportion of a bank’s liabilities that should be subordinated or eligible to bear losses under a resolution.

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

TLAC and MREL are just two of the requirements banks must comply with. Others include the leverage ratio, which measures a bank’s capital in relation to its total assets, and which must be at least 3%.

(Francesco Canepa, Mara Vîlcu for the , edited by Augustin Turpin)

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