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Basel mortgage floors could slash capital ratios at ING, other Dutch banks

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Basel mortgage floors could slash capital ratios at ING, other Dutch banks

Dutchbanks could see their capital ratios significantly eroded under proposed newglobal rules on estimating the riskiness of mortgage loans, S&P GlobalMarket Intelligence calculations show.

would losemore than 450 basis points from its common equity Tier 1 ratio, and more than 220 basispoints, if they are forced to adopt minimum risk weights of at least 40% fortheir mortgage loan books, according to calculations based on publiclyavailable data. Their ratios would fall to 11.02% and 10.67%, respectively,from 15.53% and 12.94% as at Dec. 31, 2015. Rabobank's would slide to 10.43% from 13.49% in the samescenario. In the case of SNS BankNV, a much smaller lender, the effect is more dramatic, with itsCET1 ratio plummeting to 13.33% from 25.33%.

Withthe highest loan-to-value ratios in the eurozone, thanks partly to laws makingmortgage interest payments fully tax-deductible, Dutch banks are among the mostexposed to proposed rule changes by the Basel Committee on Banking Supervision.The top global source of banking standards wants to make mortgage loan-to-valueratios a key part of its standardized models for calculating risk weights — theadjustment made to assets based on the likelihood of potential losses. It alsointends to limit the deviation of banks' own in-house models from itsstandardized approach by imposing capital floors.

Dutchbanks particularly are in line to suffer pain, Claire McNicol, a credit analystat Rabobank, said in an interview.

"Theywould need to raise capital or reduce the amount of residential mortgages ontheir balance sheet," McNicol said, adding that any retreat by banks fromproperty lending or remortgaging could open the door to competitors such asinsurance companies.

Rabobankin March sold €1 billion in mortgages to insurance company . The bank said it wanted toreduce its capital charges and took advantage of appetite among institutionalinvestors for investments with long-term duration.

Currently,the Basel Committee's standardized approach to modeling assigns a risk weight of 35%to residential mortgage loans. Under its proposed changes, these would rise to45% for loans with LTVs from 80% or above, and to 55% for LTVs of more than90%. Mortgages with LTVs of more than 100% would require the risk-weight to becalculated on the basis of the borrower's creditworthiness.

Atthe same time, capital allocations resulting from banks' internal models mayhave to be at least a minimum percentage of the standard model'srecommendations, under Basel's capital floor proposal.

Averageloan-to-values for Dutch mortgages are 101%, compared to a 79% average for theeurozone, according to the ECB. Yet despite the extent of borrowing by Dutchhouse owners, default rates in the country are relatively low, with only 0.7%of mortgage loans in arrears in 2015, compared to 1.4% in Spain and 1.6% inItaly, according to Fitch Ratings.

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ABNAMRO currently assigns an average risk weight of only 12.7% to the €159.57billion in mortgage loans which it assesses under its internal models,translating into risk-weighted assets of €20.27 billion. It has another €2.83billion of loans calculated using the standardized approach, at a risk weightof 18.01%. The loans data does not differentiate between residential andcommercial loans, which have a different regulatory treatment.

Thedisparity between in-house models and the standardized approach is starkest inthe case of SNS. The bank's standardized risk weighting of 69.5% for €1.12billion in loans compares to the 14.6% under the internal models it applies foranother €42.05 billion in loans.

Spokespeoplefor SNS, ABN AMRO and Rabobank made no response to a request for comment on theS&P Global Market Intelligence calculations after phone calls and anemailed request early on May 6. A spokesman for ING said the bank had nocomment.

BaselCommittee rules, once finalized, must be transposed into national law, openingup the prospect of furious lobbying of European officials before they areeventually enacted.

Riskweights for mortgage loans have fallen around the world following years of lowdefault rates by house owners, Hank Calenti, head of fixed-income research atWells Fargo Securities in London, said in an interview, noting that under oldBasel I rules, risk weights had been set at 50%.

"Thereare banks all across the world and across Europe with risk-weighted asset levelsthat, based on historical data, are low," Calenti said.

Capitalfloors would not have to be set very high to have a significant impact on manybanks, he said.

"Evenif they decide it's 25%, that could require banks, a number of them, to takemeasures to improve their capital," he said.

Ifthe minimum risk weight is raised to only 20%, ABN AMRO's CET1 ratio would fallto 14.01%, and Rabobank's would slip to 12.87%. ING's ratio would be reduced to12.51% and SNS's to 22.03%, S&P Global Market Intelligence's calculationsshow.

Click here to access the SNL worldwide bank ranking template and view key balance sheet figures, performance and capital adequacy ratios for individual European banks. 

Click here to view SNL's profile of individual European banks.