Bankers welcome final Basel III rules through gritted teeth


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The eventual impact of the revised capital rules will be less severe than bankers feared a year ago, even though many lament regulators’ pivot away from internal ratings.

Markets reacted well to the final Basel III rules published in December, with bank share prices rising and analysts cutting their calculations for the additional capital requirement across the sector.

Bankers Euromoney spoke to welcomed the nine-year phase in for the 72.5% output floor below which they will not be allowed to use internal risk models to cut risk-weighted assets (RWAs) as they would otherwise be determined by the blunt standardized approach.

The good news is greater risk sensitivity now coming into the standardized approach, notably around corporate credit on the cusp of investment grade and unsecured SME exposures.

Executives at institutions with large mortgage books on their balance sheets were further relieved to see some recognition of protection in low loan-to-value assets. Increases in operational risk RWAs also came in below what some had feared.

TJ Lim, UniCredit
“The final document on Basel IV issued on December 7 is somewhat more favourable than was expected,” TJ Lim, chief risk officer at UniCredit, told investors at a presentation on Tuesday, adding that: “The impact on our capital ratios is well manageable.”

Lim puts numbers on this: “For Basel IV, the current estimated impact on our CET1 ratio is around 0.9%, lower than our initial estimate of 1.5%.”

Analysts at UBS model a roughly 4% capital shortfall across the European banking sector in aggregate, which could be met within four years through retained earnings.

But they also warn investors not to take too much comfort from the aggregate analysis because the dispersal between banks could be massive: with RWA inflation ranging from zero to as high as 89% at individual European banks, even while averaging just 6% across the sector.

UBS suggests: “We think the market will give banks some three years to reach required levels, given the long regulatory phase-in period and relatively stable annual capital build. National discretion will be decisive when it comes to operational risk treatment. Timely communication from local regulators as well as companies themselves is key.”

Investors and bank executives will be poring over the signal content in dividend decisions at full-year 2017 results, mostly coming in February 2018. Will banks maintain rising payout ratios where they can, or seek to close any likely capital gap quicker than the competition? These will be fine judgements.

Mark Carney, FSB

Mark Carney, chair of the Financial Stability Board (FSB), was in full-blown self-congratulatory mode at completion of one of the key G20 reforms to address the faults that caused the global financial crisis, saying: “By reducing excessive variability in banks’ risk-weighted assets, the agreement locks in the benefits of a resilient international banking system, supported by a level playing field of common international standards. 

“We encourage full, consistent and timely implementation.”

Main relief

The main relief is that a key source of regulatory anxiety clouding the entire sector has lifted.

James von Moltke,
Deutsche Bank

“It’s a welcome outcome in the sense of a key milestone being passed, that there is now an end to the uncertainty that prevailed for most of last year and we can focus on the transition,” James von Moltke, chief financial officer of Deutsche Bank, tells Euromoney. 

“There is now an actual Basel III rule we can orient ourselves towards. We don’t have to make a lot of dramatic decisions quickly. But we will have to evaluate our businesses and make capital allocation decisions that preserve revenues while transitioning to that new regulatory world. There is a lot of work ahead.”

There seems to be a big “but” coming and Von Moltke finally unburdens himself: “Our fundamental view remains that the internal ratings-based approach is more appropriate for assessing, managing and capitalizing banking risks. And we don’t think this decision leads to the best way of measuring and handling our risks.”

Deutsche Bank raised €8 billion of equity capital in a rights issue in 2017, boosting its fully loaded common equity tier 1 ratio to 13.8% at the end of the third quarter of 2017, up from 11.1% a year earlier.

Deutsche Bank executives have long argued that it has a large but low risk balance sheet, with minimal credit write-offs in recent years, especially on secured loans such as mortgages in its home market. Its main exposure has been operational risk.

Will maintaining high ratios inhibit its and other banks’ ability to deploy fresh capital in credit formation to support the real economy and provide returns to shareholders?

Von Moltke says: “In some ways, Basel asks us to be overcapitalized for Germany where credit is very conservatively underwritten. There is a very conservative aspect to this bank for all the perception of volatile and risky businesses within it: witness not just our very strong credit performance but also low value at risk.”


As the Basel III rules were being finalized in December, bankers were also trying to manage shareholder expectations that benefits might quickly accrue from a more relaxed attitude to regulation in the US.

Having striven since the financial crisis to restore their balance sheets and their reputations, bankers won’t be rushing to trumpet any return to the business practices of an era in which they generated 20% returns on equity and higher.

But there too, a high-water mark might have passed and the high cost of analysing and enacting new regulations under the stern view of large teams of in-house compliance officers might now begin to look like a source of savings.

John Gerspach,

John Gerspach, chief financial officer of Citigroup, tells Euromoney: “We have committed to delivering significant efficiency savings over the next several years which will be done in part by re-engineering processes across Citi. 

“For example, increased digital interaction with our customers provides an opportunity for us to operate much more efficiently while maintaining high levels of customer satisfaction. In order to get that right, we will use the efficiency saves to fund further investments in technology.”

Gerspach adds: “Another area of opportunity comes from the slowing pace of new regulation. We no longer need to throw substantial resources and people at multiple new regulations, but can instead figure out the best and most efficient way to meet current regulatory guidelines.”