Europe's Bank Lobby Finds New Lease on Life as Basel Deal StallsBy and
Pan-Europe campaign won political backing for softening rules
Changing of the guard in U.S. has slowed capital-rule revamp
When global banking regulators met in secret in a London conference room to try to clinch a deal on capital rules, European industry lobbyists were nowhere in sight. They didn’t have to be.
European Union officials at the meeting in December doubled down on their call to soften rules pushed by the U.S., concerned they would penalize the bloc’s banks and cripple lending to the economy -- arguments big banks had repeated for months. The talks collapsed, and with them perhaps regulators’ best chance to stiffen global standards to police banks.
Donald Trump’s vow to tear up U.S. regulations imposed after the 2008 crash has already made reaching an agreement more difficult, and only stands to increase the resolve among industry leaders in Frankfurt, Paris and London to resist more regulation. The result: banks could end up with more freedom to repeat the mistakes of the past.
“When the next thunderstorm hits the financial market, they will be left without an umbrella,” Sven Giegold, a German member of the European Parliament who advocates greater oversight of lenders. “Unfortunately, the banking lobby has succeeded in linking weak economic growth with banking regulation.”
It’s been almost 10 years since the crisis unfolded and EU banks still aren’t out of the woods. While loan growth is near the fastest this decade and banking stocks are rallying, lenders are still shouldering more than 1 trillion euros ($1.1 trillion) of bad debt and grappling with sluggish profitability as interest rates hover near zero.
For years, the continent’s bankers struggled to get their way, the nearly 2 trillion euros of taxpayer money deployed to rescue them fresh in the minds of policy makers. As the Basel Committee on Banking Supervision installed worldwide standards known as Basel III to ensure banks could withstand future shocks, European lenders boosted capital tenfold in some cases.
But memories of the crash faded in time for bank bosses to rally against a revision of Basel III. They worried a plan to allow regulators to rein in the models many big banks use to calculate loan risks would require hundreds of billions of dollars in additional capital.
While regulators say the proposed curbs on banks’ ability to game the rules by using their own complex models to reduce capital requirements is just a backstop for Basel III, bankers nicknamed it Basel IV because they saw it as a back-door way to instigate another round of capital-raising.
Lobbyists inundated politicians and lawmakers with PowerPoint presentations and impact studies warning credit to corporations, small businesses and real estate would suffer. That, in turn, would hurt the real economy since European companies rely on bank credit more than the U.S. and some other regions.
The European Banking Federation, an advocacy group with about 4,500 members, even circulated a cartoon for those less versed in financial regulation. It portrayed bankers as runners struggling to complete a marathon as Basel regulators move the finish line farther into the distance.
The campaign found willing ears among government leaders. For a few years, growth has been their top worry because while accelerating, it’s failed to return to levels that preceded the financial crisis.
Momentum started building after two key players in the campaign, Societe Generale SA Chief Executive Officer Frederic Oudea and the head of Germany’s banking federation, Hans-Walter Peters, lobbied German and French finance ministers in June and July.
Europe’s finance ministers then issued a statement in July pushing back against the proposals, saying the committee was under instructions to avoid any further significant increases in capital requirements and introducing a new demand to shield EU banks: no region should suffer more than others. In September, European negotiators at the Basel Committee threatened a revolt over the proposals. Over the next two months, top EU and German policy makers demanded sweeping changes.
“The Franco-German alignment has been remarkable,” Oudea, also EBF president, recounted at a meeting with analysts last month.
European regulators are pitted against U.S. negotiators who want stiffer oversight of internal models to ensure banks aren’t underestimating their capital needs. After the December talks fell apart, the two sides hardened their positions and have struggled to overcome their differences since, according to three people with knowledge of the matter.
Lenders in Europe are more avid users of in-house models to assess loan risk than their U.S. peers. The concern is they might manipulate results to make their portfolios look safer than they actually are, leaving them with insufficient capital to weather losses in the event of another shock.
The lenders that failed or were rescued in the financial crisis had claimed on the eve of their collapse that they exceeded the Basel Committee’s risk-weighted capital requirements, Bank of England Governor Mark Carney said in 2014.
European bankers insist a one-size-fits-all approach to assessing risk doesn’t take into account national differences in, for instance, how loan default rates vary. A real estate loan in Germany may be less liable to non-payment than one in, say, Greece.
Critics, though, argue lenders in Europe need more capital, and bank executives could free up cash for lending if they slashed dividends.
“European banks’ capital is still relatively low,” said Isabel Schnabel, a professor of financial economics at the University of Bonn and one of German Chancellor Angela Merkel’s economic advisers. “They have convinced people that higher bank capital inhibits bank lending, although the opposite may be true.”
The industry’s uproar did, in the end, help persuade the Basel Committee to soften the cap, known as an output floor, on the extent a bank’s internal risk assessment can digress from a regulatory appraisal of the same loans. The most recent proposal stipulates modeled results can’t drop below 75 percent of the standard formula. Previously a stricter level as high as 90 percent was being considered.
With Trump opposing policies that encroach too much on banks’ freedom, Oudea put the odds for the final changes to Basel III getting done at 50-50. That’s a victory for the lobbying effort he helped conceive.
“I’ve been working for a long time on regulation at the international level and it’s the first time that I see European authorities” come together “with such unity,” Oudea said last month.