European banks falter in push to avert tougher capital rules

Bloomberg

European banks are falling short in their lobbying effort against oncoming stricter capital rules which would limit their ability to boost shareholder returns, according to people familiar with the matter.
Lenders expect the European Commission to disregard their plea to retain significant freedom to assess the riskiness of their own loans, as the region implements the global bank standards known as Basel III. A Commission proposal on the subject is expected this month, after which member states have their say.
The banks are now focused on winning extra flexibility in other areas, such as easier terms on assessing the capital required to be held against mortgages, they said.
Global regulators spent a decade after the financial crisis forcing banks to boost their equity reserves to avoid a repeat of the 2008 credit crunch and ensuing taxpayer-bailouts. European banks still face a bigger jump in required capital levels than their more-profitable US peers, as the full weight of the Basel accords is phased in by the EU this decade.
One of the most important parts of the updated Basel standards is the hard limit on the extent to which banks are allowed to calculate loan risk themselves instead of using a standardized approach, a rule known as the “output floor.” Banking lobbies have argued that this should be split off as an additional requirement — or “parallel stack” — leaving several of their relevant capital buffers unchanged.
Bank executives often contend that higher capital requirements curtail their ability to lend to businesses and the wider economy. The legislation matters in particular now, as lenders seek to win over investors after regulators imposed constraints on capital returns during the pandemic. Banks including French lender BNP Paribas SA are already signaling they want to boost returns next year, though the implementation of Basel III could weigh on other banks’ plans.
“Of course the banks are in a last frenzied lobbying effort and retrying some of the same old arguments they’ve made,” Carolyn Rogers, the secretary general of the Basel Committee on Banking Supervision, said at a conference on Wednesday.
A group of central banks and regulators pushed back last month and sent a letter to the Commission calling for Europe to not water down or delay the Basel standards.
That letter probably quashed banks’ calls for a parallel capital requirement, said the people familiar with the matter. The banks are now preparing to focus their lobbying on ensuring that the EU takes a more granular approach to capital requirements for mortgages, provides exemptions for loans to companies that lack credit ratings, and allows flexibility in the calculation of so-called
operational risk, they said.
The European Commission declined to comment on the matter. Applying the output floor to all capital buffers “overburdens” banks and the economy, a spokesperson for the European Banking Federation said in an email to Bloomberg.
The Basel standards will be applied step-by-step until 2028. They are expected to increase the capital requirements of the biggest lenders by 23% on average, the EBA said.
Tackling issues such as how to treat unrated companies would help “avoid a steep increase in the cost of lending,” the EBF said.
“Limiting the ability of banks to choose their own risk models via the Basel reform is a positive development since capital ratios are still historically low,” said Harald Benink, a professor of banking at Tilburg University. “Banks should be able to pass on the additional costs to clients given that interest rates are low anyway, or they can restrict payouts to shareholders in an effort to boost profitable lending.”
Elizabeth McCaul, a member of the European Central Bank’s supervisory board, says higher capital requirements showed their worth in the pandemic as banks were able to keep lending during the lockdowns.
“Watering down Basel III reforms in Europe because of so-called concerns about recovery puts at risk the broader trust that European banks now enjoy and that trust is something that we know would be needed in any future crisis,” she said this week.