Banks Win Converts in Campaign to Blunt Basel Capital Revamp

  • Basel Committee meets three times in next two weeks on rules
  • Bundesbank’s Dombret says proposals need to be recalibrated

The world’s largest banks are into the home stretch of a long campaign to convince politicians and regulators that planned changes to their capital requirements will suffocate the industry and imperil lending and growth. All that lobbying is paying off when it counts.

The Basel Committee on Banking Supervision holds three crucial meetings in the next two weeks as it races to wrap up the post-crisis capital framework by the end of the year. The banks warn that proposed changes in how they assess risk would send capital requirements spiraling, and key policy makers from Europe to Japan are heeding their message.

The banks’ lobbying success was on display this week. Andreas Dombret said the Bundesbank, where he’s in charge of financial supervision, had considered the industry’s arguments and concluded that “there is a need to recalibrate” the Basel proposals. The European Union’s top two officials then insisted in a position paper before the Group of 20 summit Sept. 4-5 that the Basel Committee stick to its promise not to increase capital requirements significantly as it refines risk measurement.

“The banks feel that there is a tactical opening right now for the politicians to deliver a more favorable outcome than what has resulted so far from the technocratic process,” said Nicolas Veron, a senior fellow at the Bruegel think tank in Brussels. “Banks in different markets and geographies have differing objectives, but there is coordination.”

Lobbying Power

The pressure on the Basel Committee, whose members include the Bundesbank and the U.S. Federal Reserve, marks a comeback in banks’ lobbying power after they were cast as pariahs for years after the 2008 financial crisis. The industry says proposed revisions to the rules for assessing credit, operational and market risks, as well as limits on banks’ use of their own models to make these calculations, would hinder their ability to help fuel economic expansion.

The proposals now on the table could result in an overall increase of as much as 70 percent in the capital banks must have, according to Shunsuke Shirakawa, vice commissioner for international affairs at Japan’s Financial Services Agency, another Basel member. That’s in line with the upper end of some industry estimates. Shirakawa said the Basel Committee needs to “make adjustments” to bring the new rules in on target.

‘Growing Consensus’

The Basel Committee meets on Friday in Frankfurt and again Sept. 14-15 in Basel. In between, the regulator’s oversight body is set to convene. Progress at these meetings toward a consensus on the capital-rule revisions will be crucial for meeting the year-end deadline.

If the EU’s position paper issued by Jean-Claude Juncker, head of the European Commission, and European Council President Donald Tusk, is any guide, G-20 leaders meeting in Hangzhou, China, may put additional pressure on the Basel Committee to moderate the impact of the rule changes.

“There is growing consensus not only within the private sector, the industry, but within the regulatory community that the original proposals as presented were not fulfilling the mandate of not significantly increasing overall capital,” said Andres Portilla, managing director for regulatory affairs at the Institute of International Finance, a global trade group. “Hence there was a need to revise those proposals. That’s what we understand the Basel Committee is doing at present.”

Complex Models

The lobbying onslaught by bankers intensified over the summer as they fanned out across Europe to drive home the point that the Basel Committee had gone too far in clamping down on how banks assess risks from loans, mortgages and even cyber-crime in an attempt to prevent them from using complex models to game capital rules.

The French Banking Federation and Association of German Banks teamed up in June and July to oppose the proposals, which they said would inflate capital requirements with “unprecedented consequences” for the economy. For the first time, the groups, which represent banks including BNP Paribas SA and Deutsche Bank AG, delivered a joint message to French Finance Minister Michel Sapin, and then met with his German counterpart,  Wolfgang Schaeuble.

In Frankfurt, bankers met privately with Bundesbank officials, according to a person with knowledge of the talks. The Bundesbank shared an estimate the Basel measures would have on Germany’s banking industry showing that the impact would be widely spread across banks of different business models and size, the person said, declining to provide specifics.

Basel IV

While the Bundesbank told bankers that it shared some of their concerns, it cautioned that its capacity to tone down the Basel proposals was limited, the person said.

A spokeswoman for the Bundesbank said meetings are held frequently with bankers to discuss regulatory measures, and declined to comment on specific meetings.

Valdis Dombrovskis held three meetings with powerful industry trade groups on a trip to Washington in July, days after he took over as the EU’s financial-services chief. For more than a year, bank executives have insisted that the work under way at Basel is so far-reaching that it amounts to a new wave of regulation -- Basel IV.

The Basel Committee takes a different view, referring to the process rather as the refinement of the current framework, Basel III.

“The term Basel IV is a pure propaganda move by the banks,” said Martin Hellwig, director of the Max Planck Institute for Research on Collective Goods in Bonn, Germany.

Market Risk

Global industry groups such as the IIF, the International Swaps and Derivatives Association and the Global Financial Markets Association commissioned impact assessments to back up their claims.

A European Banking Federation analysis of market estimates shows an increase in capital requirements of 600 billion euros to 900 billion euros ($671 billion to $1 trillion) for the European banking sector. The consensus of the estimates is this would mean a 55 percent increase in regulatory capital for the sector, according to the EBF.

The industry also latched on to the question of the level against which Basel’s promise should be measured, arguing that impact of market-risk rules issued in January should be factored into the increase, not the baseline. That would probably lead to a higher impact estimate and make it easier to argue that Basel was breaking its pledge.

‘Final Package’

“Our expectation is that at the end, the final framework will respect the boundaries and the mandate that was given,” the IIF’s Portilla said. “We’re all confident that that will be the outcome, but obviously we need to see the final package.”

Portilla and others in the industry should be encouraged by the statements coming from the politicians and regulators as the Basel Committee runs up against its year-end deadline.

As Dombret said: “The Bundesbank will make Basel III a priority for the second half of this year, working very closely with industry.”

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