Global regulators softening bank capital rules
LONDON/WASHINGTON — Seventeen years on from the global financial crisis, regulators are cutting red tape for their banks in a bid to keep lenders competitive and stimulate their economies.
The Trump administration is leading the charge, including with measures that will reduce the amount of capital lenders need to set aside. Lowering capital requirements is worrying some observers that the US has triggered a global rowback from regulations designed to keep financial systems safer, just as chatter about market bubbles and financial stability risks intensify.
So how do bank capital requirements in the major markets stack up, and which lenders might emerge winners?
THE GLOBAL LANDSCAPE
At the highest level, each country’s regulators should align with the Basel regulatory regime agreed after the 2008 global financial crisis. That’s designed to ensure supervisors worldwide apply similar minimum capital standards so lenders can survive loan losses during tough times. It suggests a level playing field.
But in practice there is lots of wiggle room, as the different approaches to implementing the latest rules — the “Basel III Endgame” — show.
The European Commission and Bank of England (BoE) have delayed implementation of key parts such as those governing banks’ trading activities, while they wait to see what the US does.
THE US VS EUROPE
Capital ratio requirements for banks in the euro zone, Britain and the US look similar on paper.
The Federal Reserve has a core equity tier-1 ratio (CET1) — the most common measure of capital — ranging from 10.9% to 11.8% once some add-ons are included for Wall Street banks such as JPMorgan, Citi and Goldman Sachs.
Lenders in the euro zone such as Deutsche Bank, Santander and BNP Paribas need, on average, to hold a minimum CET1 ratio of 11.2%, according to the European Central Bank (ECB).
The BoE’s financial policy committee last month lowered its system-wide estimate of capital requirements by 1 percentage point (ppt), to an equivalent CET1 ratio of around 11%.
All major lenders hold more capital than required, with these self-imposed buffers designed to keep regulatory worries at bay and investors confident.
BUT CAN YOU COMPARE?
Ask big bank CEOs and most will tell you their lender has it tougher. In reality, the picture is much murkier than that.
That’s because comparing simple ratios can be misleading, as prudential regulators take different approaches, reflecting how their local banking industries differ.
Capital rules have two parts: the risk-weighting, which gauges the risk of a bank’s assets, and a capital ratio that sets how much capital they must hold as a share of those assets.
Unlike in the UK and euro zone, US banks cannot rely on internal models to set their risk weightings, which for larger banks often means tighter constraints.
“Say it quietly, but the US may have a tougher approach,” said Jackie Ineke, chief investment officer at Spring Investments and a former banks analyst.
Higher US weightings also reflect different models: US banks tend to offload residential mortgages to public groups Fannie Mae and Freddie Mac, whereas mortgages stay on European and UK bank balance sheets.
ISN’T THE US SOFTENING ITS STANCE?
Yes.
Bank regulators appointed by President Donald J. Trump are seeking to delay and water down the introduction of new rules, and they are reviewing and rewriting existing capital regulations. They argue there is am-ple room to make them better tailored to actual risks.
Led by the Federal Reserve’s Michelle Bowman, proposals include tweaking leverage rules, the so-called “GSIB (Global Systemically Important Banks) surcharge” applied to the largest global banks, and a redo of Basel III End-game requirements.
The Fed is also overhauling its annual “stress tests” of large banks, a shift expected to shrink the capital banks must set aside against hypothetical losses.
Taken together, it means US lenders will have a lot more excess capital. Morgan Stanley analysts have estimated possible changes could hand US banks another $1 trillion in lending capacity.
That doesn’t mean the banks will necessarily lend more, however, with some preferring to increase payouts to investors to aid their share price or fund acquisitions.
WHERE DOES THAT LEAVE THE EURO ZONE, BRITAIN AND JAPAN?
Both want to ease the burden on banks, but in limited ways that suggest there is no regulatory race to the bottom.
The ECB in December announced plans to simplify its rule book but maintain capital levels. That was despite lobbying from banks arguing that softer rules would free up lending to boost the bloc’s lackluster economic growth.
Jose Manuel Campa, outgoing chairperson of the European Banking Authority, said it was wrong to conclude lower capital demands made lenders more competitive. “Well-capitalized banks are much better at taking lend-ing decisions,” he told Reuters.
The BoE last month cut its headline estimate of system-wide bank capital needs by 1 ppt to 13%, the first move downwards since the financial crisis, and said it would review the leverage ratio, which sets a minimum level of capital banks must hold relative to their total exposures, regardless of asset risk.
Analysts described the changes as important but measured.
In Japan, however, the banking regulator has pushed ahead with implementing the finalized Basel III framework, which went into effect for its three “megabanks” at the end of March 2024. The regulator had pre-viously delayed implementing the rules amid the coronavirus pandemic and war in Ukraine.
MORE TO IT THAN CAPITAL
There is more to the debate than the scale of capital requirements.
In Switzerland, for example, the government wants to toughen the rules on what counts as capital, much to the annoyance of UBS.
Then there are country-specific frameworks like Britain’s ring-fencing regime that requires banks including Barclays and HSBC to capitalize their retail units separately from their investment banking op-erations.
Supervisory enforcement often matters more than headline capital ratios in determining what banks hold, according to economist Enrico Perotti at the University of Amsterdam.
He said this is particularly true in the US, where the latent message under Mr. Trump is “to get regulators off the backs of banks,” showing that what mattered today was “less to do with numbers.” — Reuters
