Christian Ossig knows how diplomatically packaged warnings should sound. The co-chief lobbyist of the German private banks is quick to talk about the green change in the economy when it comes to banking rules in the EU. Because, as they are now on the table, threaten to become too strict, especially for the German institutes. “This transformation will not succeed without sufficient leeway in the bank balance sheets,” said Ossig on Thursday. If the regulations are too strict, one can forget about the green transformation from the perspective of the German banks. After all, who will grant the loans for the construction of wind farms and recycling plants?
The prospects are probably much better than the industry association BdB fears. Two weeks ago the EU Commission presented its banking package. This includes a roadmap for the concrete implementation of the “Basel III”, more stringent capital requirements for banks. Put simply, the main question is how risky banks can operate. And whether they should be allowed to largely calculate the risks of their lending in-house instead of adhering to generally applicable minimum standards.
Reform would be a change especially for big banks
Such binding minimum standards would be particularly painful for large banks, such as Deutsche Bank. Germany’s largest institute is known to rely heavily on the so-called internal models for calculating risk. Even today, smaller institutions have to use the models prescribed by the supervisory authorities. Basel III is intended to curtail the freedom of the big banks, with a so-called Output floor of 72.5 percent. It works like this: If a major bank grants loans and the standard rate provides for an equity buffer of 1000 euros, then the bank must hold at least 725 euros in future – even if internal calculations result in a lower value.
So far, large banks have tended to use these internal models to calculate their capital requirements on a small scale. Last but not least, this makes it difficult for the supervisory authorities to precisely record the risks in the financial system: “The unlimited scope that we have so far is too difficult to understand,” says Jan-Pieter Krahnen, Director of the Leibniz Institute for Financial Market Research SAFE in Frankfurt. “With a lot of imagination, I can basically model anything and reduce the capital requirements almost at will.” The clear message of the draft law: You are welcome to continue using your internal models, but only up to a binding lower limit.
The banking association doesn’t just want to accept that. Association managing director Ossig announced on Thursday that he would be pushing for improvements in the near future. The European Council and Parliament still have to deal with the Commission’s proposal – which will firstly take time and, secondly, give the lobby a lot of leeway to work towards changes.
The institutes still have a lot of time
In doing so, the BdB has a focus on particular European and German features. Second key argument in addition to the green change: The solidly operating medium-sized companies were threatened with higher financing costs with Basel III. The internal models for German family businesses regularly result in a capital buffer well below the output floor. “From our point of view, it is not right to burden the financing of German SMEs with additional equity across the board,” said Ossig. According to the EU draft, exceptions are only allowed if companies can show an external credit rating – which German companies in private hands often neither have nor want.
“The most expensive thing for industry and medium-sized companies is an unstable banking system,” says SAFE director Krahnen on the other hand. That is why the guidelines laid down in Basel III should be implemented “as they were intended”.
With its draft, the commission is actually staying close to the proposals made by the Basel Committee in 2017 and only gave in to the lobby on detailed issues. In a first scenario by the Brussels authority, banks in the European Union would have to increase their capital buffers by up to 8.4 percent by 2030. The Bundesbank is assuming around 20 billion euros that German banks would have to collect in addition in the coming years.
There is no need to be in a hurry. According to the EU’s plans, the implementation of the Basel III rules will not begin until 2025, two years later than planned. And the output floor should not fully take effect until 2032. That is a lot of time for adjustments that SAFE Director Krahnen considers “comparatively manageable”.