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* European regulators make case for banks
* Industry expects softened ‘Basel IV’ proposals
* Others say changes not enough, have material impact
By Tom Porter
LONDON, Sept 9 (IFR) - European bank supervisors have stepped up their campaign against ‘Basel IV’ ahead of a critical meeting of global regulators that could add hundreds of billions of euros to capital requirements.
The meeting in the Basel Committee’s namesake city in Switzerland on September 14-15 will finalise revisions to the Basel III framework, which are due by year-end.
Banks dubbed those revisions Basel IV on their emergence in 2014, to highlight an impact they claimed regulators were playing down. But opponents became more relaxed over the summer as rumours of a softening stance from the Committee circled the market.
“The sentiment that so-called Basel IV is dead is common, but the industry is being quite complacent,” said Adrian Docherty, global head of FIG advisory at BNP Paribas.
“We have yet to see Basel IV rescinded or rejigged. As it stands, it would be a step change in capital requirements and undoubtedly lead to more deleveraging.”
The Basel Committee meets again in late November, but market participants believe that is too close to the end of the year for any further substantive changes to be made.
The rules currently slated for implementation in March 2019 will introduce a standardised model for calculating risk-weighted assets, and floors on the level of risk that can be assigned to certain assets.
Banks will have to hold more capital against mortgages and large corporate loans, for example, assets that their own models had deemed low-risk based on historical data.
They will also suffer adjustments to operational RWAs, which will affect banks with heavy misconduct charges, while big trading businesses will be hit by Basel’s fundamental review of the trading book.
Docherty estimates the changes to credit and operational RWAs alone will increase European banks’ capital requirements by an average of 25%, or around 250bn.
Assuming RWAs as a proportion of total assets across Europe were to rise from 30% now to 35%, there would be a shortfall of 112bn, UBS analysts said in a recent note.
That could push the common equity tier one ratios of Credit Suisse, Deutsche Bank and Societe Generale below 10%, they added.
BASEL SHOWDOWN
The banking industry has been fighting the changes with renewed vigour, culminating in the European Banking Federation sending a letter to the Basel Committee on August 31 claiming European banks would have to find some 850bn of new capital as a result of Basel IV.
National supervisors have also stepped up the fight. At a meeting with the Committee in Frankfurt last week, they argued Europe’s banks needed breathing space on capital to encourage lending, according to a senior banker with knowledge of the discussions.
The same official told IFR he was expecting a softening of the rules and perhaps an extension of the deadline to comply beyond 2019, a view still prevalent across the market.
“We would expect some sort of softening of the regulations,” said Gildas Surry, a senior analyst at Axiom Alternative Investments.
“The ECB will be a driving factor - they need strong banks, whose valuations aren’t under stress, to transmit monetary policy to the real economy.”
SMOKE AND MIRRORS
Regulators have privately criticised banks for warning of catastrophe as a result of Basel IV, while continuing to promise investors returns on equity of well over 10%.
For banks, the stance of regulators has been hard to interpret.
The Dutch central bank has warned banks to plan for higher capital requirements for over a year. Nykredit Realkredit, Denmark’s biggest mortgage lender, is planning an IPO in the next 18 months as it cannot meet the new requirements through retained earnings.
But Bank of England governor Mark Carney has called Basel IV an “ugly rumour”, and the Basel Committee has repeatedly insisted overall capital requirements will not “significantly” increase.
“Placatory statements about no significant increase in capital need to be followed through by a thorough rejig of the Basel IV proposals,” said Docherty.
“Sadly, a simple recalibration is not enough, as the new approaches would then still be risk insensitive and at odds with reality.”
CRYING WOLF
European Banking Authority chair Andrea Enria said in July that regulators were fed up with the “hide and seek” approach of banks in lobbying against every regulatory change.
He also sought to debunk their impact studies, arguing that lenders would adapt to the new rules and that the large capital shortfalls predicted were based on static balance sheets.
But Docherty said that regulators should not misinterpret the impact studies as “hide and seek” this time.
“If the banks are accused of crying wolf, then this time there is a wolf,” said Docherty.
The proposed standardised model will discourage banks from investing in better risk modelling, for which investors pay a premium, according to Axiom’s Surry.
He argues that the complexity of the new regime with respect to applying floors to RWAs “makes comparison of banks more difficult, and does not make the sector more investable.” (Reporting by Tom Porter, editing by Alex Chambers, Julian Baker)