Banks breathe a little sigh of relief as Basel III is completed
Basel III – or IV, if you’re a banker – is finally complete, and if implemented harmoniously across countries, it could force banks to raise huge amounts of capital, but tweaks to the final proposals render them less harsh than many expected.
|Stefan Ingves, chairman of the Basel Committee, on Thursday, when new
documentation was released
The Basel Committee’s oversight body – titled the group of central bank governors and heads of supervision – has agreed on an output floor for banks that use internal models to calculate credit risk.
The group agreed on a risk-weighted asset (RWA) floor of 72.5% of what a given bank would have used under the more onerous standardized approach to assessing credit risk. That’s smack in the middle of the 70% to 75% floor the market was expecting.
According to Credit Suisse, the requirement could consume capital equivalent to about 13% of European bank lending capacity, but the committee made concessions that will ease the impact overall.
Implementation will be gradual, over a nine-year period — a longer transition period than many expected. A 50% floor comes into effect at the start of 2022, followed by 5% increases every year until 2026, when 70% will be the floor. The final 72.5% floor will be in effect in 2027.
And revisions to the standardized approach (SA) to assessing credit risk will mean that the effective burden of the 72.5% floor will be materially less for many banks. Some jurisdictions, particularly those whose banks are heavy on mortgage lending, argued the SA was too punitive.
Under the newly revised approach, banks will be able to vary risk weights on some mortgage exposures depending on their loan-to-value ratios, “and in ways that better reflect differences in market structures”, according to documents released by the Committee on Thursday.