Banks Emerge Winners From Final Post-Crisis Capital Rules

Updated on
  • Basel III agreement completes post-crisis regulatory framework
  • Draghi says ‘difficult’ implemention of rules will now begin
Stefan Ingves, chairman of the Basel Committee on Banking Supervision, talks to Bloomberg Television.

Banks emerged relatively unscathed from global regulators’ final batch of post-crisis capital rules, with few lenders needing to raise major new funds.

The Basel Committee on Banking Supervision on Dec. 7 issued new rules on how banks estimate the risk of mortgages, loans and other assets. The compromise, reached after fierce lobbying by the industry, will cause “no significant increase” of overall capital requirements, the regulator said. For some big banks, capital demands will actually decline.

The Bloomberg Europe 500 Banks And Financial Services Index rose as much as 2.9 percent on Friday. Danske Bank A/S led the gains, followed by Credit Suisse Group AG, Societe Generale SA and Lloyds Banking Group Plc and Credit Agricole SA.

Bank analysts at JPMorgan Chase & Co. said the rules are “significantly better than expected” and a positive for European banks, while UBS Group AG analysts said the final deal is a “relief” that could lead banks to soon pay higher dividends.

Barclays Plc analysts said Lloyds Banking Group and Royal Bank of Scotland Group Plc could benefit in particular from the Basel Committee’s softening of requirements for banks to have capital for potential litigation or operational risks.

Read more: Capital-Floor Detail Brings Clarity to KBC, ING Payout Potential

Dutch banks have a 14 billion-euro capital shortfall to meet the fully phased-in requirements, according to the Dutch central bank. But the banks are confident they can absorb the impact because they “have robust capital buffers and a healthy risk profile,” the Dutch Banking Association said.

In finishing Basel III, authorities set out new guidelines for calculating and managing the risk posed by trillions of dollars’ worth of mortgages, loans and other assets that lenders have on their books. It was the industry’s failure to accurately account for the peril of subprime mortgages that triggered the meltdown in confidence a decade ago. Regulators are hoping the measures announced on Thursday will make this opaque process more transparent and accountable.

The main stumbling block in the negotiations for most of the last year was a measure that restricts how low banks can drive their capital requirements by gauging asset risk with their own models. Under the compromise plan, banks’ total assets weighted for risk using their own models can’t be less than 72.5 percent of the amount calculated with a formula provided by the regulators, known as the standardized approach.

‘Interim Adjustments’

This floor is intended to guard against excessively optimistic assessments and to level the playing field with banks that use the standard formula. It will be introduced gradually to allow banks time to adjust, starting in January 2022 and reaching its final level five years later.

The phase-in, coupled with “interim adjustments made by the banking sector to changing economic conditions and the regulatory environment,” will “almost certainly” mean the “actual impact” of the new requirements will be less than estimated, the regulator said.

The Basel Committee also overhauled its standardized approaches to measuring credit and operational risk that are used by most of the world’s banks. The Fundamental Review of the Trading Book, a comprehensive reform of the standards for banks’ trading businesses that was agreed last year, will be sent back for further work, and its start date pushed back by three years years to 2022.

Significant Increase

In undertaking the reforms, the Basel Committee was instructed by political leaders not to increase overall capital requirements significantly in the process. The regulator lived up to that task, according to European Central Bank President Mario Draghi, who heads the regulator’s oversight body.

“The focus of the exercise was not to increase capital,” he said. “You have outliers, of course, and for them capital needs are going to go up.”

The total capital shortfall for internationally active banks under the new rules is 90.7 billion euros ($107 billion), according to the Basel Committee. The world’s biggest banks account for most of this gap -- 85.7 billion euros -- based on end-2015 data.

Big European banks, which were the loudest opponents of the new rules, would see a 36.7 billion-euro shortfall, according to a European Banking Authority estimate from the same time period. Both the Basel Committee and EBA said neither estimate accounted for the increase in banks’ capital over the last two years.

Lobbying Targets

The ink wasn’t dry on Thursday’s press release before banks turned their attention to their next lobbying targets: the policy makers of the European Union and Basel member countries. The Basel Committee’s standards don’t bind on banks until they’re enshrined in national rules. That will take years, and the process opens the door to further changes.

“It was difficult to reach this agreement,” Draghi said. “It’s equally difficult now that all the jurisdictions would put in place and implement the agreement in a timely and consistent manner.”

Despite what the EBA called a “limited aggregate impact” on EU banks, Wim Mijs, chief executive officer of the European Banking Federation, a major lobby group, said with an eye on Brussels that “we should not lose sight of the fact that the output floor may do significant harm to our European economy and to the global competitiveness of European banks.”

Valdis Dombrovskis, the EU commissioner in charge of financial-services policy, said the policy makers would “carefully assess” the Basel rules, including an impact assessment, before implementing them. U.S. regulators said they’ll “consider how to appropriately apply these revisions” through the rulemaking process.

“The only reason this deal was reached is that every national agency I know believes it is more critical to preserve the global framework in spirit if not now also in letter,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington. “They all fear a pell-mell race to the bottom; with the agreement, the facade is intact even if the reality remains fragile.”

— With assistance by Alexander Weber, John Glover, Carolynn Look, Jesse Hamilton, and Wout Vergauwen

    Before it's here, it's on the Bloomberg Terminal.