German banks to be among hardest hit by Basel’s proposed capital risk floors

NO WONDER Germany is on the warpath against a proposed global standard for how banks calculate the capital they need: Its largest lenders rank among the worst when it comes to how they assess risk.

That means Deutsche Bank AG and Commerzbank AG will be affected more than most big lenders and may have to raise additional capital, if and when the Basel Committee on Banking Supervision implements a proposed floor for how much their risk-weighting of assets can veer from standardized measures.

By Deutsche Bank’s own calculations, its risk-weighted assets equal just 28% of its balance sheet, compared with 50% for the six largest US banks, according to data compiled by Bloomberg.

German banks say that’s because their assets are less risky, a view supported by members of the country’s central bank. But US regulators and a group of economists advising the German government say European firms have gamed the system for too long and that needs to end. The Basel committee has published studies showing that the variation in risk weightings by banks can’t be explained by differences in portfolios alone.

While a final compromise was expected by Jan. 8, when the committee’s top management next meets, Germany’s public opposition to the proposed floor has muddied the waters. The meeting could be delayed as European and US regulators hash out their differences. The US has been pushing for a more standardized approach because Congress put partial floors under US banks’ risk calculations after the financial crisis and regulators want to level the playing field.

“While there’s some inappropriate variation in risk weighting, setting floors is not the right way to get rid of that,” said Dirk Jaeger, a management board member at the Association of German Banks, a lobbying group in Berlin. “Because that will also eliminate the appropriate variation between the risks banks face. A mortgage in Germany isn’t as risky as a mortgage in some other country, where it takes many more years to foreclose on a house.”

Spokesmen for Deutsche Bank and Commerzbank, Germany’s two largest lenders, declined to comment. Deutsche Bank executives have publicly voiced objections similar to Jaeger’s.

The proposed floors would be calculated based on standard risk weightings determined by regulators. An AAA- rated corporate bond is assigned a certain weighting wherever it is issued, as is a residential mortgage. A compromise that looked promising last month was to set the floor at 75%, meaning that a bank can use its internal models to determine risk as long as it doesn’t come up with figures that fall below 75% of what the standard formulas give for the same assets.

In that case, the standard version would become the base for calculating how much capital the bank would need to have. While German members of the Basel committee have opposed the concept of floors, they might agree to a lower level, according to some Basel members and analysts. The range originally proposed by the committee was 60% to 90%.

Sweden also has objected to the 75% floor because its banks have bigger holdings of mortgages than those in other countries. Sweden’s historically stable housing market makes such mortgages less risky than what standardized formulas suggest, Swedish regulators and banks have argued. • Bloomberg