Basel 4 rules for banks finally approved

bank  image: thinkstock
bank image: thinkstock

Israeli banks are already strictly regulated no dramatic changes are expected.

After a long period of discussions, the Basel 4 banking rules were finally approved last week. The rules were the final set of regulations instituted following the financial crisis that began a decade ago. The new regulations will take effect in 2022, and their full implementation will take place nine years after that.

The rules were approved by a group of regulators and central bank governors from 26 countries, who convened last Thursday in Frankfurt and signed the regulations. Achieving agreements between the regulators was not an easy matter. "This process differed from the ones before, and included many discussions and differences of opinion," says KMPG Somekh Chaikin head of regulatory practice Evgenia Kremer. "Even European Central Bank president Mario Draghi admitted in his speech that the rules passed were a compromise. The fact that the rules were approved by all the regulators shows, however, that the global financial regulation process may have been singed, but not burnt, despite the various countries' current clashing agendas."

The Basel 3 regulations required the banks to keep more capital. "This was the way to tell the bank that it had to rely less on external sources, so that it would be able to absorb losses without collapsing in a crisis. Most of the Basel 3 rules were discussed and approved, and some of them have already gone into effect and are being applied," Kremer says. While the previous Basel rules focused on the capital that the banks were required to have, the focus this time is on setting uniform rules for calculating the capital requirements in various business activities. The greater the perceived risk of a given activity, the more equity the bank will have to keep for it. "The previous rules allowed the banks to exercise judgment, for example in the risk in credit for commercial real estate, housing loans, and business credit, and how much capital had to be retained for them. There was also a lot of variance between the banks, which applied different internal models for calculating the same risk. The Basel 4 rules, on the other hand, establish restrictions on exercising this judgment," Kremer explains.

There are currently different approaches and rules for calculating the capital requirements. As a result, the rules for calculation in the US are more stringent than in Europe. "After the 2008 crisis, the US required the banks to improve their ability to absorb losses in a far more stringent manner than Europe. Making the requirements the same is expected to force the European banks to make up the gaps in order to meet higher standards. For example, European banks specializing in mortgages will have to substantially improve their capital," Kremer adds.

"Globes": How much do you think the new rules will affect the banks' capital ratios?

Kremer: "European banks are expected to absorb an average decline of 0.9% in their capital adequacy ratios (tier-1 equity). It is important to note that the range of influence among different banks in Europe is very wide. Some banks may profit from the new regulations. For 10% of the banks, on the other hand, it will be a significant blow that is liable to cut their capital adequacy ratio by 4%, or even more. The damage for global banks in Europe will be smaller, averaging about 0.7%. In addition to the capital requirements, stiffer requirements were set for leverage, which will be applied to banks of seismic importance - banks with large and significant activity."

What effect will there be on Israeli banks?

"It is not yet clear how and when the regulations will be implemented in Israel, but since the approach in Israel is to adopt international standards, there is no doubt that the regulations will be adopted here sooner or later. In principle, banks in Israel are already implementing stricter requirements, similar to the US approach, so no dramatic change is expected. At the same time, in the requirements on credit for real estate activity, credit for financing projects, exposure to foreign banks, and handling of lines of credit, it is possible that the banks will be subjected to more stringent requirements. On the other hand, it is possible that we will see an easing of the capital requirements for credit to small businesses or companies with a high credit rating. Nevertheless, it will take time before things clear up, and there will be a process of carefully studying the regulations.

You said that the regulators had compromised in certain matters. On what was no agreement achieved, for example?

"The parties who convened around the conference table did not manage to agree on the rules for the banks' investments in government bonds. Many banks in countries such as Greece, Spain, and Italy held government bonds on a large scale. The fall of bonds in these countries almost threw these banks into a crisis. Banks that were hit by capital losses from this investment stopped giving credit, which made the economy shrink, detracted from tax receipts, and increased the government's economic distress.

"In the Basel 4 discussions, the possibility was raised of imposing restrictions on these investments, but representatives of many countries were opposed, because they feared that it would deter the banks from investing in government debt, which would have made it difficult to finance the public sector. It was therefore eventually decided not to change the rules in this aspect."

Published by Globes [online], Israel Business News - www.globes-online.com - on December 12, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

bank  image: thinkstock
bank image: thinkstock
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