FT: Bundesbank member rebuffs criticism of new Basel reforms

FT: Bundesbank member rebuffs criticism of new Basel reforms

Bundesbank board member Andreas Dombret has rebuffed banking lobbyists’ criticism of the compromise on Basel regulatory reforms struck by global policymakers. The Basel reforms limit the extent to which banks can rely on internal models –rather than the standard tools used by regulators — to calculate their risk-weighted assets and the amount of core capital they need to hold against these risks.

Lenders in France and Germany, which frequently use bespoke models, fear the new rules will harm profitability. The European Banking Authority estimates that the European banking sector overall needs €17.5 bn in additional core capital. This compares to €277bn of missing core capital after the introduction of the Basel III rules following the 2008 financial crisis. But it will take a decade for the new rules to fully come into effect.

Banking lobbyists have sharply criticised last week’s accord. The key sticking point is to what degree a lender’s internal risk models can deviate from the regulator’s standard tools. The compromise stipulates that an asset on a bank’s balance sheet must have a risk weight of least 72.5 per cent of the calculation generated by regulators’ so-called standardized models, regardless of the lender’s internal models calculation.

“A long transition period and a staggered phase-in process give lenders enough time to adjust to the new rules”, Dombret told the Financial Times. He acknowledged that the compromise “is not our most desired outcome”, but he insisted that “German banks can cope”, adding: “We do welcome that the use of internal risk models is going to be preserved in the future.”

Only about 50 of Germany’s more than 1,700 banks are affected by the new rules, as a large majority of small- and mid-sized lenders do not use internal risk models in the first place. Moreover, Germany’s lenders have ramped up their capital buffers markedly since the financial crisis.

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