Basel tweak gives global banks another helping hand

Stockholm syndrome describes the paradoxical feelings of fondness victims may have for their abusers. Global banks, which have been whipped into holding more capital over the past decade, finally have some cause for affection towards regulators. Proposed new rules which would reduce their capital requirements for trading bonds, equities and currencies are the latest source of warm feelings.
To measure capital, banks must first adjust their assets according to how risky they are. The Basel Committee on Banking Supervision sets standard risk-weightings for different types of loans, but many large banks use their own models.
Back in December the standards setter said banks' own calculations of risk-weighted assets (RWAs) could not, on average, be less than 72.5 percent of the figure suggested by the standard model. This so-called output floor will be gradually phased in by 2027.
The standard model divides risk into three categories: credit, operational and market. Following a study of market risk-weightings, regulators are now proposing to lower the figures in their model - effectively admitting that the original calibration was overly harsh.
This is a substantial shift: the Basel Committee wants to reduce market risk-weights for general interest-rate products by 20 to 40 percent, and for equities and currencies by 25 to 50 percent. This in turn should shrink RWAs, particularly for banks with big trading operations. Last year the Basel Committee estimated that the output floor would leave the biggest banks with a 28 billion euro capital shortfall, based on 2016 figures. The latest tweak means that number will shrink.
It's not yet clear by how much, though. The Basel Committee says that in its sample of 200 banks, market risk accounted for an average of around 5 percent of RWAs. However, investment banks could feel more acute relief: market risk accounts for 12 percent of Deutsche Bank's RWAs, and for 14 percent at Goldman Sachs.
The proposals, which are to be finalised and implemented by 2022, may change. Moreover, respite is likely to be ephemeral for European lenders: common equity Tier 1 capital ratios at Deutsche Bank, BNP Paribas, Credit Suisse, UBS, Barclays, Societe Generale and Credit Agricole are expected to fall between 20 and 90 basis points in the near term due to regulatory changes and the introduction of new IFRS9 accounting standards, according to analysts at Macquarie.
Still, after a decade of near-constant punishment any reprieve from global regulators is welcome.