European banks get ready for more battles in 2018

They have already got Basel III capital standards toned down

LONDON: European banks may have scored a victory in having the Basel III capital standards toned down, but that doesn’t mean they can rest on their laurels.

There are more battles to come in 2018, in particular lobbying lawmakers on a package of measures designed to reduce risk in the system. This is deemed a vital step toward the banking union that the eurozone hopes will secure its future.

“The risk-reduction package is the big thing,” said Jacqueline Mills, a managing director and head of the Frankfurt office at the Association for Financial Markets in Europe (AFME), a wholesale-bank lobby group. “That’s where a lot of our attention is focused.”

A key part of the upcoming package is the net stable-funding ratio, which will compel banks to put in place more long-term funding and limit their reliance on short-term financing.

AFME warns this will make it harder for banks to make markets in bonds by penalizing repurchase agreements, while the International Capital Market Association says the proposal may be partly to blame for a drop in debt-market liquidity.

Banks and industry associations are furiously lobbying the European Parliament on the rules ahead of this week’s deadline for lawmakers to submit amendments. The European Council will then publish its draft rules later this year.

Read more about how banks emerged as winners from the Basel III talks

Christian Stiefmueller, a policy advisor at Finance Watch, a public-interest watchdog in Brussels, cautioned lawmakers against giving in to the long list of demands from banks.

“The commission proposal already watered down the global standards it’s supposed to transpose, and the current discussions over additional exemptions for European banks go in the wrong direction,” Stiefmueller said in an interview.

“Calling this a risk-reduction package is a euphemism.”

Here are some other parts of the proposals that are worrying banks:

The P&L, or profit-and-loss, attribution test is the term for how banks use models to calculate capital requirements and cover market risk. The rules may require individual desks to work out their own capital charges, with penalties imposed if back-testing shows they got it wrong. Billions of dollars in capital and IT expenditure are at stake.

European Parliament lawmaker Peter Simon proposes to boost leverage ratios for the European Union’s 12 globally systemically-important banks, to 4% from the 3% agreed to under Basel III.

He also wants to impose a surcharge for other important lenders. AFME’s Mills criticized this proposal, saying it links the leverage ratio with risk, which she said is inconsistent with its “non-risk-sensitive philosophy.”

Banks are uncertain about how Pillar 2 capital requirements – demands set over and above legal minimums – will be imposed. Banks want to prevent authorities from increasing a lender’s capital requirement because of risks stemming from the financial system as a whole. Yet some member states fear this would be a curb on their powers.

Internationally active lenders also want capital and liquidity levels to be set mostly at a consolidated, banking-group level. The European Commission says this would make banks more efficient, and AFME has pushed for the rules to go even further. Again, some member states are opposed, arguing the measure could hurt financial stability.

Being classed as a small lender might reduce a bank’s reporting and disclosure requirements under the new proposals. The commission plans to classify banks with less

� than 1.5bil (US$1.8bil) in assets as “small.” The parliament wants to expand this classification to lenders above that limit but still small relative to the size of the economy where they’re based.

Expanding “proportionality” is a key demand of Germany, whose banking sector is largely made up of savings banks, cooperatives and other small lenders.

Adopting the parliament’s proposal would mean that more than 90% of the nation’s banks, and almost 20% of its banking assets, would be subject to the lighter regime, according to the Bundesbank.

The commission’s plan to help banks shed soured debt includes guidelines on how lenders should provision for newly originated loans that turn bad. AFME told the commission in November that this is unnecessary because the new IFRS 9 accounting standards already address the problem. — Bloomberg