Bundesbank Sees Need to Re-Calibrate Basel Reform Proposals

  • Dombret says risky banks will see capital requirements rising
  • Bundesbank to work with industry on Basel rule reform

Global regulators’ plans for changes of banking rules will need tweaking to have the desired effect on lenders’ balance sheets, according to the Bundesbank’s top official for bank regulation, Andreas Dombret.

Work on the Basel Committee on Banking Supervision’s plans for completing the post-crisis reform package known as Basel III will be a priority for the Bundesbank in the second half of the year, Dombret told journalists Monday in the South African capital, Pretoria. The central bank will work with the German banking industry to assess the effect of the proposals, especially on mortgages, he said.

“We need to catch the outliers in the risk-weighted assets variability reliably, without having a significant increase in the capital requirements for the entire industry,” Dombret said. “We have been looking at the quantitative impact studies and feedback we were getting from the industry and there is a need to re-calibrate.”

The Basel Committee, the top rule-setter for global banks whose members include the Bundesbank, the U.S. Federal Reserve and the Bank of Japan, plans to finalize a list of new and changed rules by the end of the year. Bank industry lobbyists have convinced some policy makers with their warning that the plans could stifle growth.

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The most consequential measures curb the options banks have to reduce their capital requirements through mathematical models. Studies by academics and regulators have shown that those models produce widely varying results and suggested that they are used by lenders to downplay the risks on their balance sheets.

Deutsche Bank AG, Germany’s top lender, has been full of scorn for the proposals. Chief Financial Officer Marcus Schenck has called them “humongously draconian” and “a complete game changer for the banking industry on this planet.”

Dombret, who is one of the German officials taking part in Basel’s meetings, toed the committee’s line that on an industry-wide average, capital requirements shouldn’t increase significantly. He declined to be drawn on what calibrations exactly need revisiting but highlighted rules affecting mortgages as one potential issue for the Bundesbank.

“The Bundesbank will make Basel III a priority for the second half of this year, working very closely with industry,” Dombret said. It will focus on “understanding what the impact could be for example on mortgage loans.”

European Union leaders reiterated on Tuesday that they’ll hold the Basel Committee to its promise, made in January, to “focus on not significantly increasing overall capital requirements.”

“The intended refinements of the Basel III framework need to be subject to a thorough impact analysis and capital requirements must not be significantly increased in any of the major regions of the world,” Jean-Claude Juncker, head of the European Commission, and Donald Tusk, president of the European Council, wrote in a letter before the Group of 20 nations summit to be held in Hangzhou, China, Sept. 4-5.

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