Basel IV Is the Buzzword as Europe’s Banks Brace for Costs

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“Basel IV is coming.”

Laurent Mignon, chief executive officer of Natixis SA, sounded that alarm on July 31, referring to the mass of regulatory work in the pipeline at the Basel Committee on Banking Supervision. The issue was raised on more than a dozen other European banks’ earnings calls in recent weeks.

The coming changes -- primarily implementation and revisions of existing rules -- will increase the risk attributed to some assets, a key component in calculating capital requirements, the banks said. While most didn’t quantify the impact, Chief Financial Officer Marcus Schenck said Deutsche Bank AG’s risk-weighted assets will swell by about 100 billion euros ($109 billion) through 2019.

“The regulation largely isn’t set, so banks have used the opportunity to express their opinions and lobby for what they think it should look like,” said Jon Peace, an analyst at Nomura Holdings Inc. “It is probably going to take about two years until we get visibility on what people are calling Basel IV, so many banks will probably be compliant by then.”

Basel IV may be the bankers’ buzzword, implying a thorough overhaul of the framework known as Basel III, but the regulator takes a different view. When the final net stable funding ratio was rolled out last October, Chairman Stefan Ingves said the Basel group had “essentially completed its regulatory reform agenda” undertaken in response to the financial crisis.

Part of the confusion arises because many of the elements of Basel III won’t kick in for several years. The net stable funding ratio hits in 2018. Basel will make any adjustments to its leverage ratio by 2017 with a view to setting a binding Pillar 1 requirement a year later. The liquidity coverage ratio takes full effect in 2019. And the list goes on.

Impact Studies

In addition to capital charges, banks bemoaned the implementation and compliance costs associated with the coming regulation. UBS Group AG CFO Tom Naratil cited the expense of running quantitative impact studies.

“The biggest problem for us and actually for all banks is the uncertainty,” Andreas Treichl, CEO of Austria’s Erste Group Bank AG, told reporters in Vienna on Friday. “We finally want clarity on what the regulator expects and also a commitment that this doesn’t change every six months.”

Among specific targets for complaint, the banks listed higher operational risk and the European Central Bank’s plan to harmonize rules across the euro area in addition to the Basel committee’s fundamental review of the trading book and capital-floors proposal as factors that could force them to hold more equity.

Stiffening Rules

The FRTB proposal, the subject of several public consultations, has met with objections from the industry on issues such as its stiffening of capital rules for asset-backed debt. The plan for a capital floor based on standardized, non-internal-modelled approaches to risk assessment, is intended to reduce variation in capital ratios across banks.

“Several of these things actually are very welcome,” said Lars Machenil, CFO of BNP Paribas SA. “Things like market risk are indeed complicated today, and a simpler but still risk-based approach would probably be something that most of us welcome very much.”

Banco Santander SA and BNP Paribas said they are looking for more information from regulators about a proposal that would tie operational risk-weighted assets to total revenues.

“Regulation is far from clear here,” said Banco Santander CEO Jose Antonio Alvarez. His bank already has more capital set aside than other banks because it operates in “countries like Brazil, where the revenues are quite large” given spreads on assets, said Alvarez. He’ll be watching to see if other banks have to comply with the standardized risk models Santander uses or if regulators will come up with a new plan.

‘Negative Impact’

Meanwhile, BNP Paribas would face “a significant negative impact” if its risk models were tied to the size of its revenue, said Flora Benhakoun, a Deutsche Bank research analyst.

Banks may yet be given “levers” with which they can adapt to those rules, Machenil replied.

“These things take time in order to be calibrated, because nobody in the regulator wants to throw away all of the economy,” Machenil said. “People say, listen, Basel has to be risk-on and it has to provide elements which are linked to risk.”

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