07 December 2017

Financial Times: New Basel rules on capital hit European banks

The global reform package will hit European banks the hardest. They will have to increase their capital due to, among other factors, limits on how much the biggest banks can diverge from regulators’ risk calculations for assets such as mortgages. While formally the package is a tightening up of the Basel III rules on bank capital, bankers have dubbed it Basel IV because of what they see as its stringent requirements.

“Today’s endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems,” said Mr Draghi, who in addition to heading the European Central Bank chairs the Basel Committee on Banking Supervision, which sets rules for the world’s largest banks and whose prominence grew during the financial crisis.

Mr Draghi added that the reform package — much of which will only take full effect in 2027, some two decades after the crisis began — “now completes the global reform of the regulatory framework which began following the onset of the financial crisis.”

The agreement comes despite expectations that US president Donald Trump’s deregulatory agenda might prevent or slow down further agreement at the Basel committee.

The reforms will mean an average increase in minimum capital of 12.9 per cent for EU banks according to official estimates by the European Banking Authority, based on 2015 balance sheets. The bloc’s 12 largest banks will see a spike of 15.2 per cent, the EBA forecast, explaining that the limit on models was the biggest factor in the increase. France and Germany opposed the move until last month because they feared it would disproportionately hit their banks.

The models for calculating the risk of mortgage assets — and consequent capital requirements — are more important for European banks than for their US counterparts. This is because European banks hold more mortgages on their balance sheets, while in the US such loans are more frequently offloaded through securitisation.

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