Europe’s banks are calling for a review of tougher financial regulations on the eve of their adoption as the region sinks into a recession, dimming prospects of raising $621 billion in capital needed to meet the rules.
Christian Clausen, president of the European Banking Federation, said the cumulative impact on lenders and the economy of new rules is unknown because of their piecemeal creation during the global financial crisis. After correctly anticipating Europe won’t be ready to implement tougher standards on schedule, Clausen now wants politicians to allow an impact study to measure the economic cost of all the requirements due to be enforced.
“We don’t really know the implications,” Clausen, who is also the chief executive officer of Nordea Bank AB, said in an interview in Copenhagen. “Remember, it’s come in steps. It’s not one plan. It’s many plans put together.”
The European Union aims to implement collateral and liquidity recommendations by the Basel Committee on Banking Supervision during 2013, after a Jan. 1 deadline was pushed back. The Basel committee meets this week to resolve clashes over the liquidity provisions, which European Central Bank President Mario Draghi has said could choke interbank lending.
The Bloomberg Europe Banks and Financial Services Index fell today the most in a month, dropping 1.9 percent to 87.58 as of 10:17 a.m. in London, led by declines in Italy’s lenders. Before today, the 38-member index had gained 20 percent since Jan. 1.
Basel envisaged the new rules should be phased in from the start of next month and be effective by 2019. U.S. regulators said last month they won’t be able to apply the Basel rules on schedule.
The Boston Consulting Group estimates global lenders have to raise as much as 474 billion euros ($621 billion) to meet the requirements, which more than triple the core capital banks must hold to absorb losses.
Clausen, whose own bank is cutting about 10 percent of its workforce “over a few years” to adjust to stricter rules, estimates capital ratios may climb as high as 25 percent of risk-weighted assets if provisions for bail-in instruments are included. Nordea has already eliminated about 7 percent of its employees, the bank said last week.
“The bigger the capital, the bigger the implications,” Clausen said. “Do we want to build a society, an economy, with such a high capital level that new investments get expensive and therefore difficult to do?”
European banks have a 256 billion-euro shortfall to meet minimum Basel III core Tier 1 capital ratios based on their year-end figures, according to the Boston Consulting Group. That’s more than double the 112 billion-euro shortfall for U.S. banks.
European banks’ reluctance to lend to each other on an unsecured basis rose to the highest in 10 weeks, according to a money-market indicator. The difference between the euro interbank offered rate and overnight index swaps, known as the Euribor-OIS spread, was 14.4 basis points at 8:25 a.m. in London, from 14.2 on Dec. 7, data compiled by Bloomberg show. The spread is the widest since Sept. 21.
The 17-nation euro area fell into a recession in the second quarter as governments cut spending to reduce deficits. Several economies probably will continue contracting next year, European Central Bank Governing Council member Ewald Nowotny said last week.
Moving ahead with Basel against that backdrop “is like asking somebody who is hospitalized to run a marathon,” said Jesper Berg, head of regulatory affairs at Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds. “I’m not sure that a new impact study is needed to reach that conclusion. The impact studies we’ve seen so far have been partisan.”
The role bankers played in creating the financial crisis makes it “risky” to speak out, Clausen said. Still, decisions about how to regulate banks are also decisions about how to run the economy, he said.
“It is difficult to see how the European economy will grow because this is a drag on the economy when we have to build the equity,” Clausen said. A review of the requirement could go hand in hand with the regulatory process under way, he said.
“We shouldn’t’ scrap anything,” Clausen said. “Everything is well thought-out. But we’re adding on top all the time.”