Basel bank reforms put on hold as talks delayed
The Australian 12:00AM January 5, 2017
Michael Bennet
A major overhaul of banks’ opaque calculation of risk-taking has hit the skids after the world’s senior regulators canned a meeting to finalise new rules that could push up interest rates on billions of dollars’ worth of mortgages and business loans.
Amid increasing tension among member countries, the Switzerland-based Basel Committee on Banking Supervision on Tuesday night revealed that a planned meeting for this weekend to thrash out final details of a package of new standards would not go ahead, saying they needed more time.
Analysts said the likely sticking point was the calibration of capital “floors” to ensure banks that use more advanced internal risk modelling — including Australia’s big four lenders — could not deviate too far below standardised limits.
While Europe has led the push for a watering down of the so-called Basel IV reforms due to fears about the effect on already struggling banks, Australia’s major lenders have also railed against further capital increases after raising about $17 billion from shareholders in 2015 to meet stricter mortgage risk weighting rules.
The banks have increased mortgage and business lending rates to offset the blow to their return on equity from having more capital on their books as demand for credit slows. Suncorp yesterday unveiled the latest increase, lifting mortgage and small business rates by 15 basis points.
The Basel Committee’s delay marks a U-turn after chairman Stefan Ingves in November said the “contours of an agreement” for the contentious rules had become clear and specifics would be revealed as planned this month.
But failure by the committee’s oversight body, comprising the world’s top central bank governors and regulators, to sign off on the reforms and unveil them next week may give Commonwealth Bank, Westpac, ANZ and NAB more breathing space to increase capital levels gradually.
Shares in the big four banks yesterday rose between 0.5 per cent and 0.7 per cent.
“This delay suggests members had difficulty reaching agreement on some key issues and is likely to push back the Australian Prudential Regulation Authority’s decision on capital requirements for Australian banks,” said Deutsche Bank analyst Andrew Triggs. “We continue to expect organic capital generation will be sufficient to meet new rules; however, we think the market is now pricing in this outcome, which presents risk to share prices should APRA adopt a harsher approach.”
The new rules are set to overhaul how banks calculate “risk-weighted” assets, which in turn dictates their leverage, equity requirements and capital ratios. In recent years, regulators have grown concerned that banks can “game” the system by using their own internal models to risk-weight credit exposures, such as mortgages, and other market and operational risks at lower levels than rivals, despite the same likelihood of default.
But capital is an increasingly sensitive issue for banks because while having to increase equity makes them safer, it also reduces their ROE.
Generating fresh capital organically is more difficult for banks amid weaker economic growth, sparking concerns from Europe that higher capital requirements may result in struggling lenders reducing lending, a claim some regulators reject.
Michael Cunningham, a partner at KPMG in Sydney, said the delay meant the Basel Committee was unlikely to meet before the January 20 inauguration of Donald Trump as US president, probably pushing back any agreement “several months”.
He added that Mr Trump’s vows to dismantle financial regulations raised the prospect of national authorities implementing weaker versions of the Basel agreements.
Countries such as Germany have already suggested they may turn their back on the Basel rules if the rules are too punitive.
In a November speech, APRA chairman Wayne Byres said the regulator would continue to apply “more robust requirements” than minimum international standards, but APRA would consult before unveiling Australia’s version of the Basel reforms later this year, becoming effective late next year at the earliest.
CLSA analyst Brian Johnson said investors wrongly assumed the Basel IV reforms would be softened, notwithstanding stern speeches to the contrary from regulators saying banks should be more resilient.
He said CLSA’s contacts at global bank regulators had also played down the chances of the rules being weakened and the big four banks could have to raise $25bn to achieve common-equity tier-one ratios of 10.5 per cent of their risk-weighted assets.
“While the postponement of the Group of Central Bank Governors and Heads of Supervision meeting will likely be interpreted positively, the reality is that the delay is over calibration and it had not yet been ‘softened’ — the uncertainty remains,” he said.
In the statement GHOS chairman Mario Draghi said completing the reforms remained an “important step towards restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal”.
Reports have suggested US regulators want a capital floor of 75 per cent of standardised risk weights, while European regulators want it at the lower end of the committee’s mooted 60-90 per cent range.