EU Banks Will Cope With Diluted Basel Capital Revamp, HSBC Says

  • Analysts expect 10% capital increase on average on new rules
  • European banks still above SREP minimums including increase

New global banking rules are set to be “heavily watered down” to a level banks European can manage without major capital raising, according to HSBC Holdings Plc analysts.

The revamp of the capital framework under discussion at the Basel Committee on Banking Supervision will probably boost capital requirements by less than 10 percent when implemented in Europe, allowing banks to “cope comfortably,” analysts including Robin Down wrote in a note to clients on Wednesday. 

“With European politicians and regulators repeatedly pushing back on any change that produces a ‘significant’ increase in capital (which we’d define as over 10 percent), it finally looks as though the drive for higher CT1 is done,” the analysts wrote, referring to core Tier 1, the highest-quality capital. “An increase of 10 percent to risk-weighted assets is something which we anticipate most of the sector could cope with.”

The Basel Committee is racing to finish work on the post-crisis capital framework known as Basel III by the end of the year, and it’s under instructions not to increase overall capital requirements significantly in the process. The debate in Basel pits bank regulators from Tokyo to Frankfurt against a U.S.-backed push for stiffer standards.

Asset Disposals

Philippe Heim, chief financial officer of Societe Generale SA, said earlier this month that banks may face an increase of about 10 percent in their capital requirements as a result of the Basel Committee’s proposed changes in how they assess credit, market and operational risks.

Using the 10 percent capital requirement increase on a sample of major European banks, the HSBC analysts calculate that only UniCredit SpA would end up with a capital shortfall. For the Italian bank the analysts are “already anticipating a combination of asset disposals and equity raising” independently of the Basel plans.

The fact that the capital increase will be less pronounced than expected, and that it marks the end of a series of capital raisings, will leave banks more certainty and more room to pay out dividends, they said.

“It does appear as though we’re moving away from the post-crisis ‘capital phase’ and into a new era,” according to the analysts. “We believe that is a significant step forward for the banking sector and one that has not yet been fully appreciated by the market.”

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