The Wall Street Journal | By: Paul J. Davies |May 25, 2017 9:14 a.m. ET:
Long battle over update to Basel capital rules is finishing closer to U.S. demands
If walking away from the table was a U.S. tactic in negotiations over global bank capital rules, it appears to have worked.
The result: European banks are going to face limits to the capital benefits they get from sophisticated risk models. That will ultimately mean higher capital requirements for some although they are unlikely to have to go straight out and raise extra equity because the new standards will be phased in slowly.
This was set out Thursday by William Coen, secretary-general of the Basel Committee. He said the group of regulators that sets minimum global banking standards was getting close to a final agreement.
The outcome looks to be significantly more restrictive than European banks and politicians wanted. The banks likely to see the biggest inflation in their balance sheet are those focused on high-quality mortgages, or large corporate loans. Banks such as Germany’s Deutsche Bank , Société Générale of France, Lloyds Banking Group in the U.K., or Sweden’s Nordea could be among the hardest hit.
Banks like these use sophisticated internal models to assess the risks of their assets by looking things like at the historic likelihood of default, the level of collateral attached and expected losses. This produces a measure of the size of their balance sheets known as risk-weighted assets, which is then used to set capital requirements.
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