Watered Down And Delayed - European Bank Shares Love The Final Basel III Capital Rules

To the relief of the banks and investors, the Basel III rule book was “watered down” sufficiently that the announcement that the deadlock had been broken led to a spike in European bank stocks on Friday morning. The sticking point holding back the clarification of Basel III for nearly a year had been how to adjust capital requirements for the risk of assets like mortgages. In particular, how far the banks’ models for calculating risk could diverge from more conservative assumptions – known as the “standardized approach” - used by regulators. Under the compromise deal, dubbed Basel IV, banks’ total risk-weighted assets cannot be less than 72.5% of the amount calculated in the standardized approach.

Germany and France had opposed the proposals fearing that their banks would be hit disproportionately. Because they have more mortgages on their balance sheets than their US counterparts, European banks have benefited more from using models.


For banks in the European Union, the new rules will mean an average increase in minimum capital of 12.9%, although the twelve largest systemically important banks will see a 15.2% rise, mainly due to the limit on models. As usual, however, banks will be allowed many years to make the required adjustment. The new rules have been delayed from 2019 to 2022. According to Bloomberg.

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 Thursday broke a deadlock on curbs 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.

“This has been tossed around so much over the last six months that it was clear that it would have to be watered down to see the light of day,” Piers Brown, an analyst at Macquarie Group, said after the rules were published. Brown said there is a “long way to go” before the rules apply, and as the standards are translated into national rules we could “end up with something that looks a bit different.”

The Financial Times noted that the pan-European Stoxx 600 index spiked 2.9% when European markets opened on Friday. The biggest gains were French, German and Dutch lenders, including SocGen, Credit Agricole, Deutsche Bank and ABN Amro.



It’s only taken nine years from the the last crisis for bank regulators to agree the final element of their response. Terrible when you reflect on it. As Bloomberg notes, however, investors are hoping that the good times can roll again in the banking sector, shrugging off concerns that the industry would be better placed for the next crisis if Basel III hadn’t been watered down. But who cares now…right.

Investors are already cheering the potential for higher dividends and more acquisitions by banks now freed from the prospect of higher capital requirements. “Banks with significant excess capital can have a much clearer discussion with their shareholders about buybacks and dividends,” said Barrington Pitt Miller, a money manager specializing in global financial stocks at Janus Henderson Group Plc. Finishing the Basel III rule book “allows banks to think about a bolt-on acquisition or the acquisition of a portfolio.”

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.

Despite this Mario Draghi, who chairs the Basel Committee’s supervisory body, portrayed the agreement as a major success. From the FT.

“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 Mario Draghi, the European Central Bank president who also chairs the supervisory body of the Basel Committee on Banking Supervision. Mr Draghi added: “The package of reforms endorsed by the GHOS now completes the global reform of the regulatory framework, which began following the onset of the financial crisis.”

To affect the compromise, European political leaders instructed the Basel Committee was instructed by political leaders not to increase overall capital requirements significantly. The Committee calculated that the total capital shortfall for banks which are “internationally active” is 90.7 billion euros ($107 billion). The big European banks, which were the most vociferous in their opposition, are estimated to have a capital shortfall of 36.7 billion euros based on 2015 data.

The new rules aren’t binding until they’ve been agreed in each of the member nations. This process could not only take years but, as Macquarie’s Brown noted above, might lead to further changes. The real irony, however, is that the regulators’ response to the last crisis will probably not be fully implemented before the next crisis.