EU Delays Bank Capital Rule Following Nordic Protest

EU Delays Bank Capital Calculation Rule Following Nordic Protest
Scandinavia’s banks, among the best-capitalized in Europe, argue the EBA’s approach doesn’t reflect the safety of their mortgage assets. Photographer: Casper Hedberg/Bloomberg

The European Commission will take an extra month to decide on rules affecting how banks calculate their capital ratios after Scandinavia criticized existing plans that the region argues would unduly penalize its banks.

The decision to delay follows an outcry from bankers associations in Denmark, Sweden, Norway and Finland, who say a European Banking Authority proposed reporting requirement for capital buffers would overstate the risks associated with their mortgage assets. The commission had been due to decide on the EBA’s proposal this month.

“The Commission is aware of the” demands from “among others, Danish banks and will assess this strictly on the basis of the relevant articles in the Regulation before proceeding to the formal adoption of the standard,” Chantal Hughes, a spokeswoman for the commission, said in an e-mailed response to questions late yesterday.

Scandinavia’s banks, among the best-capitalized in Europe, argue the EBA’s approach doesn’t reflect the Capital Requirements Regulation approved by the European Parliament earlier this year and ignores the safety of their mortgage assets. The mostly AAA-rated covered bonds that back the mortgages drew investors seeking refuge during Europe’s debt crisis, driving down interest rates and underpinning borrowing in the Nordic region.

‘Clear Position’

“We would appreciate a rapid conclusion,” though “we understand fully that, with such a big file, this will take some time,” Erik Johansen, head of economics and capital markets at Oslo-based Finance Norway, said by phone today. “Our position is very clear and they know about our view on this.”

It’s not the first time Nordic banks have taken on global regulators. Danish lenders lobbied to change 2010 liquidity rules by the Basel Committee on Banking Supervision, arguing they threatened to destabilize the world’s biggest mortgage-bond market per capita. Those efforts led to some concessions inside Europe, though a final outcome is still pending.

Scandinavia’s financial industry, backed by the European Banking Federation in Brussels, had appealed the EBA’s proposal, and is urging the commission to reject it. The commission now has until the end of November to decide whether to approve the EBA’s proposal. It can endorse all or part of the draft or require the EBA to make changes.

Interpreting Rules

“We are confident that the European Commission and the EBA now will have time to reach an agreement on the reporting of the Basel 1 floor which will be fully consistent” with the CRR, Michael Friis, head of prudential regulation at the Danish Bankers Association, said by e-mail. That will ensure “a solid legal basis for a harmonized reporting” which “is important for the functioning of a single rule book for European banks,” he said.

At issue is how to interpret a floor on capital requirements designed to prevent banks underestimating balance sheet risk. Under Basel transition rules that apply until 2018, banks are free to use an internal ratings model as long as they don’t breach a given floor.

Yet countries have employed different methods for arriving at the floor. According to the draft EBA reporting requirement, the floor should be interpreted as a lower limit on risk-weighted assets, giving lenders less leeway to calculate their own loss probabilities. That contradicts rules given to European banks under the Capital Requirements Regulation, according to Johan Hansing, chief economist at the Swedish Bankers’ Association.

Floor Sought

European regulators first sought to impose a floor on capital levels in 2007, after Basel II rules gave banks more freedom to assign risk weights to their assets. Five years later, the EBA said it found “serious discrepancies” in national interpretations of the floor with “deeply unsettling” results.

While banks in Sweden and Denmark have defended the quality of their mortgage assets, Standard & Poor’s has criticized them for what it calls inadequate matching of funding and lending maturities. The ratings company warned in July it will downgrade lenders who fail to take steps to address the risks.

In Scandinavia, bankers associations argue the EBA’s proposal would hurt a region that has already taken more steps than most to fortify its financial industry against the risk of losses. Most Scandinavian lenders already exceed national capital requirements, which are stricter than Basel III rules.

If the commission accepts the EBA’s proposal, it would be “a major problem for Nordic banks,” said Elina Salminen, an analyst at the Helsinki-based Federation of Finnish Financial Services.

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