Planned global banking rules not balanced, need changes

Friday, 30 September 2016 00:01 -     - {{hitsCtrl.values.hits}}

untitled-1Reuters: A planned reform of global banking rules being discussed by the United States, Europe, Japan and other major economies risks negatively affecting European banks and needs to be changed, the EU financial services commissioner said on Thursday.

The Basel Committee, a body of banking supervisors from nearly 30 countries, set the year-end as the deadline to conclude an overhaul of banking rules - known as Basel III - meant to make the sector safer.

But opponents, mostly in Europe and Japan, reckon the review goes too far, as they fear it disproportionately increases how much capital banks must hold against risk.

“As things stand, the proposals Basel has issued for consultation would imply significant capital requirement increases in all areas,” EU Commissioner Valdis Dombrovskis said at a banking conference in Brussels on Thursday, in the most explicit criticism so far of the review by an European official.

EU finance ministers had called for the reform to not significantly increase capital requirements for banks but have so far stopped short of criticising publicly what is on the table from global regulators.

“We want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe’s banking sector,” Dombrovskis told the conference organised by the European Banking Federation.

European bankers were “encouraged” by Dombrovskis’ “change of tone” compared with past EU statements on the issue, a banking official said, noting it remained to be seen what capital requirements increase would be acceptable to the EU in a possible deal with the United States.

Officials at banking trade body AFME estimated the new rules would likely increase capital by at least 6% on average. Tweaks to the rules may reduce the increase, the banker said.

The rise in capital requirements would hit mostly European banks, the industry fears, because under the proposed rules their large loan portfolios would make them look more risky than U.S. banks which provide more bond financing and package mortgages on for trading elsewhere.

A second banking source said Europe may consider a Basel deal as “guidance” and apply it flexibly.

Contrary to the United States, banks still represent by far the main source of funding for companies in Europe.

“A solution we could not support is one which would weigh unduly on the financing of the broader economy in Europe,” Dombrovskis said, according to a speech distributed to media.

With sluggish economic growth and a teetering banking sector, EU and Eurozone officials are keen to avoid saddling their banks with further costs and restrictions that may reduce their ability to make loans to companies and households.

The German government had to deny on Wednesday that a rescue plan was in the works for Deutsche Bank, Europe’s biggest lender, in case it was unable to pay a fine of up to $14 b from the U.S. Department of Justice for its activities before the 2007-08 financial crisis.

EU’S red lines

Amid concerns of a possible collapse of the international negotiations, Dombrovskis said a deal in Basel was important but set clear conditions to reach a compromise.

“There remains work to be done on a number of areas which are important for the EU economy,” he said.

He urged capital requirements to be calibrated on banks’ risks and business models, a key European request as its banking sector is more fragmented than elsewhere.

“It is perfectly normal for a bank focused on lending in a sector and region with low risks to have lower average risk weights than a bank operating elsewhere. We believe it is important to keep it that way,” he said.

The Basel reform aims at reaching a standardised approach to make the sector safer, as it would rely less on benchmarks developed internally by banks.

U.S. regulators are also pushing for a common ‘floor’ or level of capital a bank cannot go below, irrespective of its internal risk calculations.

“We do not believe a standardised capital floor is an essential part of the framework,” Dombrovskis said.

He also urged further work on the treatment of real estate loans, corporate lending and infrastructure lending.

The weighting of operational risk, seen by many as one of the elements of the reform that may be pushed back beyond the December deadline, could cause, “arbitrary capital requirements that do not properly reflect the risks faced by banks” Dombrovskis said.