Banks prepare for battle as Europe plans rules to cut risk

Bloomberg

European banks may have scored a victory in having the Basel III capital standards toned down, but that doesn’t mean they can rest on their laurels. There are more battles to come in 2018, in particular lobbying lawmakers on a series of measures designed to reduce risk in the system. The regulations are deemed a vital step towards the banking union that the euro zone hopes will secure its future.
“The risk-reduction package is the big thing,” said Jacqueline Mills, a managing director and head of the Frankfurt office at the Association for Financial Markets in Europe, a wholesale-bank lobby group. “That’s where a lot of our attention is focussed.”
A key part of the upcoming rules is the net stable-funding ratio, which will compel banks to put in place more long-term funding and limit their reliance on short-term financing. AFME warns this will make it harder for banks to make markets in bonds by penalizing repurchase agreements, while the International Capital Market Association says the proposal may be partly to blame for a drop in debt-market liquidity.
Banks and industry associations are furiously lobbying the European Parliament on the measures ahead deadline for lawmakers to submit amendments. The European Council will then publish its draft rules later this year. Christian Stiefmueller, a policy adviser at Finance Watch, a public-interest watchdog in Brussels, cautioned lawmakers against giving in to the long list of demands from banks.
“The commission proposal already watered down the global standards it’s supposed to transpose, and the current discussions over additional exemptions for European banks go in the wrong direction,” Stiefmueller said in an interview. “Calling this a risk-reduction package is a euphemism.”
The P&L, or profit-and-loss, attribution test is the term for how banks use models to calculate capital requirements and cover market risk. The rules may require individual desks to work out their own capital charges, with penalties imposed if back-testing shows they got it wrong. Billions of dollars in capital and IT expenditure are at stake.
European Parliament lawmaker Peter Simon proposes to boost leverage ratios for the European Union’s 12 globally systemically-important banks, to 4 percent from the 3 percent agreed to under Basel III. He also wants to impose a surcharge for other important lenders. AFME’s Mills criticized this proposal, saying it links the leverage ratio with risk, which she said is inconsistent with its “non-risk-sensitive philosophy.”
Banks are uncertain about how Pillar 2 capital requirements — demands set over and above legal minimums — will be imposed. Banks want to prevent authorities from increasing a lender’s capital requirement because of risks stemming from the financial system as a whole. Yet some member states fear this would be a curb on their powers. Internationally active lenders also want capital and liquidity levels to be set mostly at a consolidated, banking-group level.
The European Commission says this would make banks more efficient, and AFME has pushed for the rules to go even further. Again, some member states are opposed, arguing the measure could hurt financial stability.