Association of German Banks calls for phased and globally consistent introduction of Basel requirements
06 September 2010 - The Association of German Banks warns against overshooting the target when introducing new capital adequacy and liquidity management rules. "It is clear that more capital is needed. But it's also clear that raising this new capital will be onerous – that's why a sense of proportion is important," said Hans-Joachim Massenberg, the association's Deputy General Manager. "Going too far will jeopardise economic recovery and the positive labour market trends." On 7 September the Basel Committee on Banking Supervision is to unveil a package of new capital requirements (Basel III), which will be adopted at the G20 summit in Seoul in November.
Initial measures were made public on 26 July 2010. There was some public perception that major elements had been watered down. But there could be no question of that, in Massenberg's view, particularly given that the new capital ratios had not yet been set.
He said it was true that the banking industry's arguments had been taken on board during the negotiations to date. The key point, however – and this had also been stressed by German supervisors – was to consider the impact of the new rules and regulations as a whole. The most important aspect was the minimum regulatory capital ratios. The current regulatory minimum for Tier 1 capital is 4%, but a 6% floor was assumed in the EU stress tests. "Banks face enormous challenges in this area," said Massenberg, "especially bearing in mind that the July measures alone would halve current Tier 1 capital ratios at some banks."
The Basel Committee has also announced the introduction of capital buffers over and above minimum capital requirements. "This is tantamount to raising capital requirements, which is why we reject fixed capital buffers," Massenberg continued. By contrast, the German private banks support countercyclical buffers. "Nevertheless, a number of issues remain to be clarified, particularly with respect to precisely how the buffer will operate." In view of these uncertainties, it was difficult to understand why all the members of the Basel Committee – with the exception of the Germans – had already agreed to the requirements.
It was in any event essential, stressed Massenberg, to introduce the new Basel framework in phases and over time. Otherwise there would soon be a run by banks on regulatory capital, which would have to be raised in the form of capital increases. "Since the capital market will probably be unable to respond and many banks have no access to the capital market, they need time to grow their capital base through earnings. This applies all the more given that the new requirements will reduce banks' profitability and hence attractiveness."
The Association of German Banks was also critical of certain aspects of the definition of Tier 1 capital and of some "inappropriately high deductions of valuable positions." And though the Basel Committee had shifted its stance on some other points, such as the recognition of participations in financial institutions, the impact would nonetheless be substantial.
The association reiterated its criticism of a general limit on leverage. "We consider a leverage ratio counterproductive," said Massenberg. A ceiling without any weighting of risk runs counter to the objective of stabilising the financial system. "According to our calculations, it would also further constrain lending." The association anticipates that an additional 36 billion euros of capital would need to be raised in Germany to meet the Basel Committee's planned leverage ratio. This would mean a €1,ooo billion cut in lending if banks were unable to cover their capital needs.
With a view to the G20 summit in Seoul in November, the Association of German Banks urged that the Basel measures should be introduced in a globally coordinated manner. "We must act together, or there is a danger of Basel III not being implemented at all in some countries, thus distorting competition," Massenberg continued. He pointed out that the US had not even implemented Basel II up to now. The Association of German Banks advocates a phased, internationally synchronised introduction over a period of several years, with quantitative impact studies monitoring each individual step.
Massenberg also emphasised that banks faced further burdens. Average profits after tax across the German banking industry were around €11 billion in the last ten years. The banking levy would now siphon off €1.3bn, while the German Finance Ministry was planning to take a further €2 billion in a financial activity tax. Meanwhile, banks are supposed to broaden their capital base.
"Each measure to strengthen capital adequacy may well make good sense viewed in isolation. But taken together, especially with the planned levies, they risk placing too great a burden on the banks. The combined effect of the measures posed a threat to banks' core business, namely funding the economy – with all the associated negative implications for growth and employment," warned Massenberg.
