Meeting report
Reforming global bank capital requirements: What does it mean for Europe?

Reforming global bank capital requirements: What does it mean for Europe?

Time: November 25, 2016 – 12h30 to 16h00
Place: European Parliament (ASP A5E1), Brussels

The global standards for bank capital requirements will once again be revised. The package that forms the completion of Basel III, also labeled Basel IV, was discussed during the CEPS-IRCCF HEC Montreal High-Level Seminar in the European Parliament.

Co-organised by the Centre for European Policy Studies (CEPS) and the International Research Centre on Cooperative Finance (IRCCF) of HEC Montreal, this seminar gathered together policy-makers, supervisors, bankers, researchers and other experts,

This timely seminar took place just days after the European Commission launched a banking reform package and on the eve of the meeting of the Basel Committee on Banking Supervision in Santiago (Chile) to agree on the revisions of the global standards.

All the participants underlined the need for revisions, although there were divergent views expressed on how the capital requirements should be revised. The revisions currently debated include measures to change both the standardized and internal ratings-based approach for credit and operational risks as well as surcharges on the leverage ratio of global systemically important banks.

Looking at the motives behind the revisions, the supervisors want to make the simpler standardized approach a more credible alternative to the internal models-based approach and reduce the differences between the models with a more restrictive capital floor. Bankers fear that in particular, the capital floors will lead to higher-than-necessary capital requirements, which will restrict banks in lending to the real economy. In their view, the revisions should take into account national specificities. For example, they argued, pointing to research of the supervisors, that their own models can better determine the risk weights for exposures, for which they have collected vast amounts of historical data on the default probabilities and losses (e.g. Danish and Dutch residential mortgages).

Researchers from IRCCF, CEPS and OECD emphasized the need for more stringent back-up requirement in the form of a higher leverage ratio. They showed empirically that the enhanced use of internal models has eroded the average capital requirements. In particular, the average risk weights of banks with more market-oriented activities such as derivative exposures, had decreased in the aftermath of the crisis. The researchers argued that a more explicit adjustment for business models in the capital requirements should be considered. Moreover, the leverage ratio has in general been a better predictor of bank distress, with banks showing leverage ratios above 5% being unlikely to fail. The average leverage ratio of European banks is already above this level, but many primarily larger banks would have to increase their capital to reach this level. The regulators argued that European banks have sufficiently improved their capital in recent years, with higher and better quality capital. The revisions should therefore not lead to significant increases in the capital requirements, but only change the distribution across banks.