In Focus Risk
‘Basel III: no material impact on credit-granting processes’
The updated capital-adequacy rules may have a positive outcome for lenders, allowing them to optimise their portfolios
Christian Capuano Head of the risk management department, banking division, FINMA
Our analysis indicates that banks subject to the 2011 European Banking Authority (EBA) capital exercise, which required them to increase their capital ratios, reacted by reducing their average credit exposures (de-leveraging) rather than by increasing their level of capital. Therefore, we anticipate that the finalised
Basel III reforms will lead banks to decrease the assets they finance as they will face higher required capital ratios.
A different magnitude There are many reasons why the quantitative conclusions of the research paper by SFI professor Steven Ongena et al. are likely to be of a different magnitude following the implementation of the final Basel III reforms. In particular, one has to bear in mind
that the 2011 EBA capital exercise was conducted in a fragile market environment, dominated by the sovereign-debt crisis, whereas today the economic cycle is on a stronger footing, which is consistent with the positive market reactions across jurisdictions observed after the 7 December Basel Committee on Banking Supervision (BCBS) announcement of the finalisation of Basel III. The finalised Basel III is a comprehensive
set of reforms that are not limited to capital ratios, but include liquidity and leverage ratios as well. Therefore, the implications for banks’ willingness to extend credit will be a blend of the impacts of these different regulatory measures. In particular, the reforms address all types
of risk that attract capital – namely credit, market, and operational risks – and do not focus only on credit-risk requirements.
April 2018
www.CCRMagazine.com Second, the stated objectives of the reforms
have included reducing excessive variability in credit risk risk-weighted assets (RWA) – between internal-rate-based approaches and standardised ones – with the additional aim to not significantly increase overall capital requirements, as publicly stated by the Basel Committee in March 2016. Third, the reforms have also increased the
risk sensitivity of the credit-risk framework, in particular for exposures under the standardised approach. As the relative price
(in RWA terms) changes, capital becomes more or less expensive for a certain asset class, which incentivises an optimal – and more risk-sensitive – reallocation of resources from more expensive to less expensive assets. Finally, a major feature of the Basel III
reforms is the timing of their implementation. While the EBA required banks to increase
Therefore, we anticipate that the finalised Basel III reforms will lead banks to decrease the assets they finance as they will face higher required capital ratios
capital ratios within six to nine months following the exercise, the Basel III reforms are expected to be implemented by 2022, with some important elements of the framework – such as the RWA floor limiting the difference between RWAs under internal-rate based and standardised approaches – to be fully binding only in 2027. This timeline allows jurisdictions to adequately implement the new framework and provides banks with the opportunity to smoothly adjust to the new requirements, avoiding potentially negative consequences for the broader economy.
Conclusion In conclusion, my expectations are that the implementation of the Basel III reforms will lead to a combined set of reactions from banks and no material impact on the credit- granting process. Banks that might see capital requirements
increase will be incentivised to restructure, or reduce certain businesses, while achieving enhanced efficiency and increasing the capital base through issuance or revenue retention. Other banks will have the opportunity to
expand, or further optimise, their balance sheets. CCR
Edited from an article originally written for SFI’s Practitioner Roundups.
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