Banks Push Back Against Basel’s ‘Surreal’ Plans

  • New rules would be ‘game changer’ for financial industry
  • Argument about impact leads to splits on Basel Committee

European bankers are ramming home their message that global regulators are trying to impose outlandish new rules that aren’t backed by the mandate they got from policy makers.

Finance chiefs exploited pledges by G20 and European Union finance ministers to avoid boosting capital requirements as they campaigned against the plans during earnings calls in past weeks. Rules drafted by the Basel Committee on Banking Supervision would penalize lenders and hinder their ability to finance economic growth unless they are cut back significantly, executives said.

Marcus Schenck

Photographer: Jasper Juinen/Bloomberg

“Right now it looks like the impact is humongously draconian and would essentially be a complete game changer for the banking industry on this planet,” said Marcus Schenck, Deutsche Bank AG’s chief financial officer, speaking on the company’s analyst call last week.

“There is a lot of work still going on to see how this can be put in sync with what I think was last stated on the G20 meeting, where they again reiterated that this Basel 3 refinement is not meant to cause any significant additional capital need on the side of the banking industry,” Schenck said.

Banks are pushing back as the Basel Committee, whose members include the Federal Reserve and the European Central Bank, overhauls rules on how lenders calculate the riskiness of their assets. Regulators claim that internal models have been used to game capital requirements and understate risks, while bankers argue that the measures are a departure and have dubbed the package “Basel IV.”

Model Curbs

Among Basel’s suggestions are limits on the extent to which banks’ internal models can differ from standardized approaches and capital floors that can’t be undercut by internal models. As banks in Europe and Japan are bigger users of such models, opposition to this attempt is widespread there.

For a QuickTake on banks’ risk-weighting and leverage, click here.

The proposals are “I would say, surrealistic,” Credit Agricole SA CFO Jerome Grivet said on that bank’s analyst call last week. Responding to a question on whether regulators were likely to ease up, he speculated that the “absurdity” of the rules was such that the proposals were increasingly likely to be dropped altogether.

Banks have persuaded some finance ministers and central bank governors. Starting with the Basel Committee’s governing body in January and the Group of Twenty Nations’ finance ministers in February, the policy makers on whom Basel’s power rests called on the committee to calibrate the new measure carefully.

“The committee will focus on not significantly increasing overall capital requirements,” Basel’s oversight body, chaired by ECB President Mario Draghi, said in January. In Shanghai, G20 ministers vowed they support Basel’s efforts “without further significantly increasing overall capital requirements across the banking sector.”

Adding to the work on credit risk models, Basel’s new market-risk rules will increase trading-book capital charges, and it also intends to bar the use of models in assessing operational risks such as fraud or litigation.

‘Stuffed’

Iain Mackay, HSBC Holdings’ CFO, who previously said the industry would be “stuffed” if Basel’s plans are left unchanged, added his voice to the complaints.

The effect of the committee’s proposals on operational risk and credit risk, if implemented as stands, “would be very significant for the industry,” he said on his company’s analyst call. “And it would be significant for HSBC.”

The potential effect of the proposals has split the Basel Committee, with regulators from Europe, Japan and India pushing back against the U.S., where Federal Reserve Governor Daniel Tarullo argues that the proposals are vital to stop lenders manipulating their models.

According to Shunsuke Shirakawa, vice commissioner for international affairs at Japan’s Financial Services Agency, a member of the Basel Committee, the proposals could boost capital requirements by as much as 70 percent. European finance ministers have also weighed in, as has the Reserve Bank of India.

Daniele Nouy, head of the ECB’s supervisory arm, told EU lawmakers in June that “there was an overwhelming majority around the table” at the Basel Committee against imposing a significant increase in capital. She dismissed banks’ claims to the contrary, saying they are adding up an unlikely combination of worst-case scenarios. “Obviously, if you add together all the toughest possible outcomes, the toughest possible elements, the result is a significant increase, but in my view this is not going to happen.”

Bankers say the politicians, eager to ensure credit flows to businesses, are getting the message that it should translate to “as little as possible.”

“Definitely the awareness of what is at stake at the highest political level, as well as with the corporate world, is currently much higher,” said Frederic Oudea, chief executive officer of Societe Generale SA, speaking on the company’s analyst call last week. “Thanks to the effort banks in Europe collectively did to explain what was at stake. So, I think that’s a real progress.”

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