Last year, it was a package of measures which the market has started calling “Basel IV”, a concept that Mark Carney, governor of the Bank of England, says does not exist.
This year, as the market slows down into Christmas, regulators will likely be feverishly working to finish off the latest update to the Basel rules. Some expect it in 2016, but the Committee has had a knack of finishing off major projects so that they hit inboxes in the week before the holidays.
At stake is another vast hike in the level of capital banks must hold, as the Committee proposes to roll back individual bank discretions over the riskiness of their assets.
2014’s package of regulation floated the idea of a new way to calculate standard risk weights, and a limit to risk weight reduction that can come from using internal models, instead of standard risk weights.
The Committee is expected to update the market this year on how it plans to take the new proposals forward.
Most crucial for the capital constrained big banks is the floor on credit risk. That would limit the capital banks can save by moving a portfolio to the internal ratings based approach to credit risk, instead of the standardised approach to credit risk.
The change could hit hardest low risk portfolios, such as prime residential mortgages. The standardised approach assigns a 35% risk weight to mortgages, compared with risk weights of 15% or even lower which are common for internal ratings based approach banks.
So if using internal models can only cut the capital requirements of a portfolio to 60% or 70% of the level of the standardised approach, because of a regulatory 'floor', this means a huge leap in capital requirements for low risk books. Deutsche Bank’s bank equity research team estimate a 60%-70% range (though started with a 75% base case).
Even at this level, the numbers at stake are large. If the floor comes in at 60%, Credit Suisse estimates the change means 25bp-100bp off its core capital ratio, and if it comes in at 70%, it could be between 100bp and 250bp.
At the top end, that’s about Sfr7.2bn — larger than the giant rights issue Credit Suisse just completed.
But hope is at hand. Mark Carney reiterated last week his claim that there will be no “Basel IV”.
He argued that the impact of the new measures, for UK banks at least, would be muted — a funny way to describe a regulation which could mean Sfr7bn in extra capital at just one global bank.
Credit Suisse is an enthusiastic user of internal models — but all of the UK majors are similarly enthusiastic, have large prime mortgage book, and are all larger than Credit Suisse. If they have to raise more capital, that matters. Whether or not one chooses to define the new raft of regulation as another of the Basel brood or not, it certainly isn’t nothing.
But Carney is better informed than any market observer about the Basel Committee’s thinking on the subject. He is chair of the Financial Stability Board, and, in effect, chief prudential regulator at one of the world’s most energetic regulatory bodies.
That points to a different order of magnitude in regulatory softening — or at least, a number right at the bottom end of the range. In the past year, calls for growth, new lending and an end to the regulatory ratchet have accelerated, and may now, finally, be being heard in the Committee.
Watering down prudential capital rules arguably comes with problems. In the UK, howls of anguish from the challenger banks, which generally do not have the scale or track record to allow them to use internal models — but the big banks should hang up their stockings expectantly.