Banks win big over Basel rules
vienna/frankfurt/london — Banks emerged relatively unscathed from global regulators’ final batch of post-crisis capital rules, with few lenders needing to raise major new funds.
The Basel Committee on Banking Supervision on December 7 issued new rules on how banks estimate the risk of mortgages, loans and other assets. The compromise, reached after fierce lobbying by the industry, will cause “no significant increase” of overall capital requirements, the regulator said. For some big banks, capital demands will actually decline.
The Bloomberg Europe 500 Banks And Financial Services Index rose as much as 2.9 per cent on Friday. Danske Bank led the gains, followed by Credit Suisse Group, Societe Generale and Lloyds Banking Group and Credit Agricole.
Bank analysts at JPMorgan Chase & Co said the rules are “significantly better than expected” and a positive for European banks, while UBS Group analysts said the final deal is a “relief ” that could lead banks to soon pay higher dividends.
Barclays analysts said Lloyds Banking Group and Royal Bank of Scotland Group could benefit in particular from the Basel Committee’s softening of requirements for banks to have capital for potential litigation or operational risks.
Dutch banks have a €14 billion capital shortfall to meet the fully phased-in requirements, according to the Dutch central bank. But the banks are confident they can absorb the impact because they “have robust capital buffers and a healthy risk profile,” the Dutch Banking Association said.
In finishing Basel III, authorities set out new guidelines for calculating and managing the risk posed by trillions of dollars’ worth of mortgages, loans and other assets that lenders have on their books. It was the industry’s failure to accurately account for the peril of subprime mortgages that triggered the meltdown in confidence a decade ago. Regulators are hoping the measures announced on Thursday will make this opaque process more transparent and accountable.
The main stumbling block in the negotiations for most of the last year was a measure that restricts how low banks can drive their capital requirements by gauging asset risk with their own models. Under the compromise plan, banks’ total assets weighted for risk using their own models can’t be less than 72.5 per cent of the amount calculated with a formula provided by the regulators, known as the standardised approach.
‘Interim adjustments’
This floor is intended to guard against excessively optimistic assessments and to level the playing field with banks that use the standard formula. It will be introduced gradually to allow banks time to adjust, starting in January 2022 and reaching its final level five years later.
The phase-in, coupled with “interim adjustments made by the banking sector to changing economic
the focus of the exercise was not to increase capital. you have outliers, of course, and for them capital needs are going to go up Mario Draghi, President of the ECB
conditions and the regulatory environment,” will “almost certainly” mean the “actual impact” of the new requirements will be less than estimated, the regulator said.
The Basel Committee also overhauled its standardised approaches to measuring credit and operational risk that are used by most of the world’s banks. The Fundamental Review of the Trading Book, a comprehensive reform of the standards for banks’ trading businesses that was agreed last year, will be sent back for further work, and its start date pushed back by three years years to 2022.
In undertaking the reforms, the Basel Committee was instructed by political leaders not to increase overall capital requirements significantly in the process. The regulator lived up to that task, according to European Central Bank President Mario Draghi, who heads the regulator’s oversight body.
“The focus of the exercise was not to increase capital,” he said. “You have outliers, of course, and for them capital needs are going to go up.”
The total capital shortfall for internationally active banks under the new rules is €90.7 billion ($107 billion), according to the Basel Committee. The world’s biggest banks account for most of this gap — €85.7 billion — based on end2015 data. — Bloomberg