Banks Unite to Oppose Basel Draft Interest-Rate Risk Rule

Banks around the world are joining together to oppose new rules on accounting for interest-rate risk proposed by the Basel Committee on Banking Supervision, according to a German industry group.

“The international banking industry agrees here that this plan has to be fought with all means,” Michaela Zattler, head of banking supervision at the Association of German Banks, told reporters in Frankfurt on Monday. The Washington-based Institute of International Finance will probably issue a joint statement rejecting the current draft of the rules on behalf the industry, which is “quite rare,” she said.

The Basel committee, which brings together the U.S. Federal Reserve, the European Central Bank and other regulators, wants to ensure that banks have enough capital to cover potential losses if and when interest rates change. Banks are against setting fixed capital requirements to account for risks, according to the German group.

Global central banks cut interest rates to stoke economic growth following the 2008 credit crunch and the subsequent debt crisis in Europe. The European Central Bank is among those to have pushed some rates below zero in a bid to spur bank lending and stimulate economic growth.

The Basel committee proposed overhauling its current rules for interest-rate risk, including possible binding standards on how banks should measure their resilience to shock rate changes, and on the capital they should have to cover potential losses. The plan concerns possible losses on assets that banks intend to hold to maturity, a part of their inventory known as the banking book.

Radical Option

The regulator set out two options for strengthening the banking-book regime. The first would toughen the existing supervisor-led approach, including by boosting the amount of information that banks have to disclose.

The second, more radical option would see this system replaced by minimum capital requirements set centrally by the Basel committee, which nations would be expected to make binding on their banks.

This option neglects national differences and could drive up the cost of long-term borrowing, said Michael Kemmer, the German association’s general manager. The association, which represents German commercial banks including Deutsche Bank AG and Commerzbank AG, supports the wider goal of ensuring banks are prepared for changes in interest rates, he said.

“A better alternative would be to work on the Pillar 2 approach, namely on internal models,” said Kemmer. “That can be streamlined, a bit more standardized, but the idea that the banks should have more freedom to steer things according to internal facts, as they normally do in Pillar 2, shouldn’t be tampered with.”