Governance rules getting tougher for EU banks

While the changes are still at the committee stage in the European Parliament, they would heap even more pressure on financial institutions’ governance practices if passed. 

Here’s what’s going on:

The European Parliament’s economic affairs committee is voting on a draft law concerning the banking industry this week. 

A draft leaked to Reuters has revealed two crucial amendments concerning cryptocurrency and diversity.

This means that if the law passes:

• Banks must have even more capital available to cover fluctuations in the cryptocurrency market. 

Banks must be more ESG-centric, particularly around their policies on diversity in recruitment.

The amendment would apply a 1,250% risk weight to European banks’ crypto-asset exposure. This means having enough capital to cover a complete collapse in relevant crypto assets. 

To those governing banks and those regulating them, this amendment is a final stepping stone to implementing Basel-III recommendations. 

Basel-III was an accord first published in 2010 in the wake of the global financial crisis. Banking watchdogs aimed to avoid a repeat of institutions being over-exposed to financial risk and relying on taxpayer money when problems arose. 

Today, crypto remains a hugely controversial area for the amount of risk it carries, so EU lawmakers continue efforts to step in where they feel necessary.

According to Reuters, there are multiple amendments in this category, but they fall under the same umbrella. 

Firstly, they would legally tie banks to the increasing trend of tying remuneration with ESG progress. In other words, executive compensation goes up if the institution’s record on tackling ESG risks improves. 

There has already been a sharp increase in the number of firms doing this in Europe. A recent study by Guerdon found that over 80% of companies in France, Germany Switzerland tie executive compensation to ESG.

Secondly, the amendments call for a “fit and proper” regime for diversifying banks’ management bodies. 

This regime should focus on varying the age range, gender balance, and geographical and educational background, according to information from EP committee chair Jonas Fernandez. 

Again, Europe’s banks have excelled in this area already. An EY survey released earlier this month found more balance at the board level (58% male to 42% female) and an even split when narrowing down to new board appointments. 

However:

• Movement is uneven across the bloc, with some states outperforming others
• That survey referred only to boards, whereas these amendments target broader management.

Again, the European Union is flexing its muscles, and banking leadership should pay close attention to what may become new governance rules.  

However, they should have time. Amendments like these usually wouldn’t take hold for several years to allow organisations to adapt.

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