September 15 2016

GBIC on Basel IV negotiations: great danger of German banks being placed at a considerable disadvantage

The member associations of the German Banking Industry Committee (GBIC) warn that the ongoing Basel IV negotiations could place German banks at a considerable disadvantage. The international negotiations at the Basel Committee on Banking Supervision on completing Basel III (“Basel IV”) are proceeding apace and are to be concluded by the end of the year. As recently confirmed at G-20 level, it is not intended that capital requirements for financial institutions will significantly increase.

In GBIC’s view, this target will in all probability be met at most worldwide and on average. Quantitative analysis by German banks has found that, based on the current status of the negotiations, it is highly likely that German banks will in future face much higher capital requirements.

As a result, German banks will need a considerable amount of additional regulatory capital. In consequence, the banks will have to either significantly cut back on lending or raise additional capital. In the current market environment, capital increases are very difficult, however. GBIC strongly warns that there is a danger of a severe reduction in lending and a further worsening of the already sizeable strain on the banks’ profitability. This could have extremely adverse effects, especially on property and corporate finance and urgently needs to be avoided.

The German banking industry therefore calls for the following:

  • The undertaking by the Basel Committee that there will not be significant increases in capital requirements must be met not only at global, but also at regional level (USA, Europe and Asia). This is also in line with demands by the European Union. Nor should German banks be disadvantaged.
  • The final calibration must be designed in such a way that none of the planned measures result in a significant increase in the corresponding risk category (e.g. credit risk, market risk, operational risk). This should apply, in particular, to the standardised approach to credit risk and the internal ratings based (IRB) approach. Specific business models of banks, companies or exposure classes should not be placed at a disadvantage.
  • The Basel Committee should neither restrict nor prohibit the use of risk measurements based on internal models. First, disallowing the use of models would significantly reduce the risk sensitivity of capital requirements. Second, it would create incentives to cut the resources invested to date in the use and development of these highly developed measurement methods and thus weaken risk management. This could lead to errors in banks’ management processes and destabilise the financial system.
  • There should be no floors based on standardised approaches for capital requirements calculated with the help of internal models.
  • When implementing the final Basel standards in the EU, adequate account should be taken of the interests of small and medium-sized banks, bearing in mind the type, complexity, interconnectedness and level of risk of their business activities.
  • Specific characteristics of the German property finance market, with its long-term fixed interest-rate commitments, have a stabilising effect and should be reflected in risk weights. It is essential to differentiate risk weights (for the same loan-to-value ratio) according to the level of risk inherent in the property market in question.
  • The SME supporting factor, which reduces capital requirements for loans to small and medium-sized businesses by around one quarter, should be retained on a permanent basis for banks using the standardised approach. Analyses of the German market show that the risks associated with lending to SMEs are far lower than previously assumed.
  • The drastic increase in capital requirements for specialised lending (especially in the real estate area) is not justified in any way and should be dropped. The new rules would have an impact on, among other things, commercial property finance (shopping centres, housing to rent) and on funding renewable energy and infrastructure projects. Unless the calibration is changed, there would be dramatic – sometimes more than five-fold – increases in capital requirements in both areas, especially for real estate financers.

GBIC stresses that European lawmakers should diverge from the Basel Committee’s recommendations if the European negotiators are unable to gain acceptance of the above requests. Otherwise, there is a danger that the European, and also the German, banking market will be placed at a disadvantage compared to other international financial markets. 

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Dr. Kerstin Altendorf, Tanja Beller
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Dr. Helga Bender
Verband deutscher Pfandbriefbanken
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+49 30 20915-330

bender@pfandbrief.de

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