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Local regulation, phase-in key to success of Basel deal: European banking sector

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Local regulation, phase-in key to success of Basel deal: European banking sector

The European banking industry and analysts warned that the deal on banks' minimum capital requirements announced by the Basel Committee on Dec. 7 would unfairly penalize lenders in several countries and impact the competitiveness of the sector compared to international peers.

Several urged regulators to adapt the new measures when enforcing them through local regulations. Some observers said a phase-in period of the new rules around the output floor would limit the adverse impact of the so-called Basel IV standard, which will require European banks to hold an additional €40 billion in capital. The output floor announced Dec. 7 effectively limits the way banks use their internal models to calculate risk weightings on assets and means they can assign a risk weighting of no less than 72.5% of the calculation achieved by the standardized approach set by regulators.

However, the industry broadly welcomed the fact that central banks had finally reached agreement on the last chapter of the Basel III framework, nearly eight years after the rules were first implemented after the financial crisis.

These were some of the reactions (edited).

European Banking Federation CEO Wim Mijs: "This agreement marks the end of the wave of global regulations stemming from the 2007 financial crisis. That is very good news. However we should not lose sight of the fact that the output floor may do significant harm to our European economy and to the global competitiveness of European banks. The output floor could impair the benefits of the finalized Basel III package and endanger the balance, so it is important that all parts of the world introduce the new requirements in a harmonized way."

The EBF said separately: "The situation of the European banking system and the economic conditions have significantly changed since the Basel Committee launched the 'Finalization of Basel III' program in 2014. The most recent data from the European Banking Authority shows that European banks have continued increasing their loss-absorbent capital.

"The ratio of highest-quality capital, fully loaded core equity Tier 1, has increased from 11.5% in December 2014 to 14.0% as of June 2017. Similarly, the fully loaded Tier 1 leverage ratio stands at 5.1% for the EU banking sector as a whole. Liquidity ratios have also improved across EU banks, showing that the problems that Basel III was meant to tackle have been to a large extent overcome in the EU."

The Dutch Banking Association: "Dutch banks are in good shape, have robust capital buffers and a healthy risk profile. They will therefore be able to absorb the capital impact ... However, Dutch banks still have concerns about an international level playing field for banks. When implementing the proposals, the European Union should take differences between countries and sectors into account.

"The next step is the implementation of the new Basel standards into European law. The European policymakers (European Commission, European Parliament and Council) will have to make their own assessments about this and may decide to amend the proposals to bring them more into line with European economic reality and regulations."

The Swedish Bankers Association: "The Basel standards will, if they are fully implemented in the EU and Sweden, have large negative effects for Swedish banks, their clients and the Swedish economy.

"It is not reasonable that Swedish banks, which are already among the best capitalized banks in the world, will suffer harder than other banks by the new Basel regulatory framework. We assume that the implementation in the EU and Sweden takes place in a manner that does not jeopardize the risk-based capital requirements that are successfully used in Sweden," the association said, citing CEO Hans Lindberg.

"The estimations of the global management consulting firm Oliver Wyman indicate that the major Swedish banks will be required to hold [150 billion Swedish kronor to 200 billion kronor] in extra capital if a floor of 72.5% is introduced. If new regulation will be implemented requiring banks to hold extra capital, it will result in higher interest rates for both companies and households, which in the long run will have a negative impact on Swedish growth and welfare.

"The regulation will be very blunt when globally agreed standard methods, and not the actual risk, will form basis for the pricing of credit."

Swedish banks and Finansinspektionen, the Swedish Financial Supervisory Authority, are keen to keep a risk-based approach. To avoid new regulations having negative effects for Swedish banks, the EU and Sweden will have to adapt its regulation. For example, Finansinspektionen must revise the specific national requirements currently imposed on Swedish banks.

The Belgian Financial Sector Federation, Febelfin: Febelfin called for open international collaboration on the transposition of the Basel agreement into regulations around the world, to ensure all countries were on "a level playing field." Febelfin called on European regulators to pay careful attention to the characteristics of the European banking sector and its global competitiveness.

Mark Austen, CEO of the Global Financial Markets Association: "With the completion of this latest package of measures the banking industry looks forward to a period of stability to plan its future with confidence and certainty. We agree with the Financial Stability Board that now is the appropriate time to assess the impact of the entire post crisis regulatory framework and we look forward to working with the [Basel Committee] and FSB in considering what refinement may be necessary."

Karl-Peter Schackmann-Fallis, executive board member of the German Savings Bank Association: "To reach a compromise on an international level on the highly controversial output floor of 72.5%, concessions were made over the past few months, which will burden European banks significantly more than others over the coming years. However important globally-agreed standards may be, we had expected a greater consideration of the European financing culture as a whole."

He said German banks will be able to manage under the current regime thanks to their "good capitalization." He said the final agreement was "helpful" as it provides clarity for the financial sector.

Mark Carney, chair of the Financial Stability Board: "Agreement on the final elements of Basel III means that G-20 reforms have addressed the fault lines that caused the global financial crisis. By reducing excessive variability in banks' risk-weighted assets, the agreement locks in the benefits of a resilient international banking system, supported by a level playing field of common international standards. We encourage full, consistent and timely implementation."

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Tom Kinmonth, fixed-income strategist at ABN AMRO: "The finer details are really the important part" as they might determine how the agreement is implemented on a national level, which might change from one country to another. The phase-in time is also important as it will determine how much of an impact the agreement will have in the short and longer term, he said. In the shorter term, banks will deal with repricing while afterward the economy will have an impact on how they determine their RWAs.

"Banks will be forced to hold extra capital ... It will be the public that has to put up the cash as banks reprice their portfolios. Banks will have to hold back capital; it won't be going to dividends and things like that. It's a bit of a shame really."

Pierre-Brice Hellsing, a Stockholm-based associate, financial institutions, at S&P Global Ratings: "Nordic banks won't be under any immediate pressure to raise more capital as a result of the output floor, because the transition period is so long."

In addition, Nordic banks have "strong ability to generate capital" compared with their European peers, Hellsing said, which means that they shouldn't struggle to build up their capital. This is largely down to the fact that they tend to have a "highly efficient" culture and good cost-to-income ratios thanks to digitization and low number of bank branches, he added.

Martin Neisen, partner and head of the Basel IV advisory team of audit firm PwC: "The revised regulatory framework will affect the strategy and business models of European banks and will trigger a redistribution of capital across the financial system." Neisen warned that even with the extended implementation date (2022) and phase-in period (2027) for the new rules, banks do not have much time to prepare.

"Although the time for implementation of the reform package seems far away, banks need to take action now," he said. "It is clear that banks will need a lot of time, money and significant resources to understand, implement and manage the aftermath of the reform."