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Europe's 'Big Bang' for Bank Rules Set to Sputter

Friday, 24 Aug 2012 08:30 AM

A hoped-for "big bang" start next year for new rules to make banks safer is set to sputter in Europe, creating more uncertainty in a sector struggling to win back investor confidence lost in the financial crisis.

Basel III, the core reform of global banking rules hammered out following the 2007-2009 financial meltdown, starts on Jan. 1.

But delays in turning it into European law means banks and regulators face a piecemeal introduction that widens the scope for confusion, while nervous markets are forcing banks to comply quickly even before some of the rules are finalized.

"The political pressure to start on time is enormous and the room for man oeuvre is very small," said Jan Sinclair, country manager for Germany at Swedish bank SEB.

Europe had hoped to approve its law for implementing Basel III by July, giving regulators enough time to flesh out about 40 additional technical rules to implement it in time for the Jan. 1 start.

It will now be at least October before the law is ready, due to delays such as the European Parliament wanting to insert new elements like capping bonuses of bankers at a level no higher than their fixed salaries.

Germany this week moved to push ahead with national implementation of Basel, with Finance Minister Wolfgang Schaeuble saying he hoped other Europeans would share "this sense of urgency."

The United States has also pledged to introduce Basel III for its 20 or so biggest banks — whereas Europe is covering all of its 8,000 banks — but the Federal Reserve is still at the proposal stage for its implementation.

HIGH HURDLES

Basel III is regulators' response to the financial crisis that showed banks held too little capital to withstand market shocks, leaving many of them to be rescued by taxpayers.

The rules will force banks to hold core capital of 7 percent by January 2019, roughly triple the amount currently required. Rules governing banks' liquidity and leverage or debt positions will be phased in.

Many lenders already meet Basel's core capital buffer rule while European Union countries like Sweden and Britain demand even more.

The European Banking Authority (EBA) is fleshing out the EU law but has already been forced to delay some of the new reporting requirements by a year to January 2014. Britain's Financial Services Authority has taken a similar step.

Banking supervisors agree not all the new rules will be ready by January, but insist they will use existing powers to require banks to report on liquidity and leverage from day one.

Supervisors say banks will also have to start using the much tougher definition of what can be included in core capital buffers.

But banks say they won't be ready for Basel's hefty new credit value adjustment (CVA) capital charge to cover the possibility of derivatives customers going bust.

"Banks have a good idea of what might be required but it's a bit of a range at the moment," said Richard Barfield, a director at accounting and consultancy firm PwC in London.

"What they are looking for is certainty around those parameters," Barfield added.

Some regulatory officials say a European delay in the CVA charge is all but inevitable even if this triggers U.S. complaints. The Basel Committee of central bankers has already criticized Europe for diverging from parts of their accord.

MARKET PRESSURE

Banking supervisors have signaled they are willing to use discretion given the tight timetable, but that may end up creating more uncertainty for banks and investors.

"Banks don't want to depend on a nod and a wink from regulators; they want an orderly introduction of the rules," said Gerhard Hofmann, a board member of Germany's BVR association of cooperative banks and former Bundesbank official.

Supervisors say they would prefer to formally acknowledge the delays and set later dates for the parts of the Basel III that won't be ready by January.

This is essential, they say, to avoid the danger of leaving markets, banks and investors confused at a time when there is already deep suspicion about bank safety due to the eurozone debt crisis.

However, banks know that whatever the delay on paper, in practice they will get little relief. "The markets will force us there anyway as there is little credence in the 2019 end date," a European banking industry official said.

Banks have estimated that it could take up to a year to get their computer systems to run the Basel calculations smoothly, once the final regulatory demands are known. In the meantime, they may have make 'manual' calculations to satisfy regulators.

In view of the technical delays, investors seem willing to cut banks some slack, though for how long remains unclear.

"It is not necessary that banks fully fulfill the Basel III capital requirements exactly by January 2013," said Torsten Martens, a portfolio manager and sector specialist for banks at MEAG, the investment arm of the world's biggest reinsurer, Munich Re.

"However, it seems that markets, including ourselves, are demanding a much shorter phase-in than the 2013-2019 period," he said.

© 2017 Thomson/Reuters. All rights reserved.

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