Stricter rules on how banks calculate the amount of capital they need to cover risks from fines or other parts of their operations are likely to see some banks need to bolster their balance sheets. The Basel Committee of global regulators on Friday set out proposals for how banks assess operational risk, another step in their attempt to limit the ability of big banks to use their own models to cut the amount of capital they need.
"While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks," said Stefan Ingves, chairman of the Basel Committee. That could include Deutsche Bank and others who face higher litigation costs, according to analysts at Morgan Stanley.
"We think Deutsche Bank has the most risk for operational risk weights to rise, given its litigation outlook," Morgan Stanley analyst Huw van Steenis said in a note. In all, however, analysts said the proposals were not as severe as a previous draft and will have a more modest impact on bank capital than many had expected. "Although this is negative news for the sector, it was expected by us and the market ... the amended version is a better-than-expected outcome," analysts at Credit Suisse said on Tuesday.
That offers some comfort to bankers who are concerned there is little sign of a let-up in new rules more than six years after the 2007/09 financial crisis. Regulators have said they now want to shift from new rule-making to implementation, but bankers have complained that will still mean demands for layers of more capital to be added. The Basel Committee said the operation risk changes are part of its aim to improve the simplicity, comparability and risk sensitivity of the capital framework.
After the crisis, regulators found huge disparities in capital holdings because big banks used different models to assess risk. As a result, banks are being told to be more consistent and often increase the risk weightings they apply to their assets. The proposed operational risk rules are likely to see group risk-weighted assets (RWAs) rise by 4%-4.5%, equivalent to depressing banks' common equity ratios by 40-50bp, Credit Suisse analysts estimated.
Ingves said for most banks the proposals should have "a relatively neutral impact on capital". Under the proposals, lenders will use a "business indicator" based on their financial statements, which would reflect the complexity and size of balance sheets. Banks would then be allowed to have a "loss indicator" that reflected actual losses going back a decade, which could justify a lower capital figure than the one thrown up by the business indicator. But for banks who have had big fines or other costs, it could increase the estimated loss figure.
Van Steenis estimated operational risk now accounted for about 21% of banks' total RWA, up from 14.5% in 2012. The average is about 27% for US banks and 30% at Swiss banks. But at UK and eurozone banks it averaged about 13%, he estimated, meaning they could face a greater impact as their models adjust. Credit risk, which covers the threat of losses from loans not being repaid, represents the majority of the calculation of how much capital banks need to hold. The Basel Committee, whose rules are applied in about 100 countries, has yet to decide when the new rules will come into force. It has given banks and other market participants until June 3 to respond to the proposals.
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