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.


Batman11 Sat, 12/09/2017 - 15:50 Permalink

Banks know the type of lending they should engage in ........“We need to bailed out/recapitalised so we can lend into business and industry”Unfortunately, this is where less than 20% of their lending goes in the US and UK and the unproductive lending builds up in the economy until a Minsky Moment occurs, e.g. 1929, 2008.Looking at unproductive lending in the US and UK economies.https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png1929 and 2008 suddenly stick out like sore thumbs.Unproductive lending into stocks/real estate and financial speculation were building up in the economy.The UK does what the US did before 1929 and 2008:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.pngUnproductive lending pours into real estate and financial speculation from 1980 - 2008.Bank credit (lending) creates money.There are three types of lending:1)    Into business and industry - gives a good return in GDP and doesn’t lead to inflation2)    To consumers – leads to consumer price inflation3)    Into real estate and financial speculation – leads to asset price inflation and gives a poor return in GDP and shows up in the graph of debt-to-GDPRichard Werner explains in 15 mins:https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3sIt’s actually very straight forward.The new normal of secular stagnation in the West is the “old normal” in Japan; almost no inflation or growth in GDP. Japan had its Minsky Moment in 1992.Richard Koo has worked that out as well, he’s had decades to work on it.https://www.youtube.com/watch?v=8YTyJzmiHGkRichard Koo explains Janet Yellen’s inflation mystery and the West’s problems with growth, productivity and inflation.We bailed out the banks, but left the private debt in place and the repayments on debt are dragging the economy down. It’s the problem Japan has had for decades.The West turned Japanese in 2008, apart from Germany that didn’t load up with private debt.The emerging markets have been loading up on debt since 2008 and the whole world is reaching saturation.Globalisation used an economics that didn’t look at private debt, neoclassical economics, and the way globalisation would fail was set once this fateful decision had been made.Those that saw 2008 coming said you can’t solve a debt problem with more debt. The world can only take so many of the banker’s debt products and the repayments on all that debt are now dragging everything down.Adair Turner has been looking for solutions.https://www.youtube.com/watch?v=LCX3qPq0JDA  

Batman11 Batman11 Sat, 12/09/2017 - 15:52 Permalink

Banking was never just another business, and giving banks the goal of maximising profit just ensured we reached the final destination of global debt saturation as quickly as possible.The money supply = public debt + private debtThings work well while all the new debt is coming on line and the money supply increases creating a general boom. Once people start deleveraging the amount of private debt decreases and you start heading towards debt deflation.The critical role of banks in creating the nation’s money supply was unknown by policymakers.The IMF predicted Greek GDP would have recovered by 2015 with austerity.By 2015 it was down 27% and still falling.The Troika (IMF, ECB and EU Commission) demonstrate they don’t know and anyone calling for austerity in a balance sheet recession didn’t know.Richard Koo explains in the video in the first comment.The technocratic experts of globalisation were experts in what they knew, which wasn’t enough. 

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