Capital requirements will fall for large EU banks due to market integration

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Capital requirements for EU-based global companies systemically important banks will decline in the future as international regulators recognize the progress made in the integration of the European banking market.

The Basel Committee on Banking Supervision said on May 31 that it would adjust the systemically important bank, or G-SIB, requirements for credit institutions headquartered in the EU to reflect the further development of the European Banking Union project, aimed at creating a single market for all banks in the bloc.

Under the adjusted methodology, all cross-border exposures of banks that fall within the EU will be treated as domestic exposures. This will result in a 66% reduction in banks’ existing G-SIB scores, the Basel Committee said.

BNP Paribas SA, based in France, and Deutsche Bank AG, based in Germany, have the highest scores and, therefore, the highest capital requirements among EU-based G-SIBs, according to compiled data. by S&P Global Market Intelligence.

G-SIB scores are determined by evaluating major banks that are globally active in five equally weighted categories — size, interconnection, substitutability, complexity and cross-border activity. Final scores, measured in basis points, are then mapped into “buckets” that determine their minimum capital ratio requirements. At the end of 2021, Deutsche Bank was required to hold 2% of total risk-weighted assets as an additional G-SIB capital buffer. BNP Paribas was to hold 1.5% of total risk-weighted assets.

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As of March 31, BNP Paribas ranked second in total risk-weighted assets among European G-SIBs, while Deutsche Bank ranked eighth. In terms of risk density, which is the ratio of risk-weighted assets to total assets and a measure of the overall risk of a bank’s balance sheet, both banks ranked in the middle of the group of 17 lenders. , according to data from Market Intelligence.

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Regardless of the impact of the adjusted methodology, BNP Paribas and Deutsche Bank will, from 2023, reverse places in terms of capital requirements for G-SIBs. BNP Paribas’ cushion will increase to 2% and Deutsche Bank’s will fall to 1.5%. This reversal is based on BNP Paribas’ latest G-SIB score which jumped 27 basis points as the French group saw the strongest year-on-year growth in overall size and cross-jurisdictional activity. among all G-SIBs at the end of 2020.

Deutsche Bank, on the other hand, scored lower in size, interconnection, complexity and cross-border activity compared to a year ago and its overall G-SIB score fell by 2 basis points.

The German group expects the Basel Committee’s new methodology for EU-based banks to further reduce its score. “In our calculation, if the EU 27 [member states] …were considered a single market, our G-SIB score would be lower because we have …an almost entirely fungible currency, and you get closer to fungible liquidity and fungible capital over time,” said Deutsche Bank chief financial officer James von Moltke said at a June 9 financial conference.

BNP Paribas was not immediately available for comment.

EU regulators will release more details on the new G-SIB rating methodology as well as new disclosure requirements for relevant European banks’ cross-border exposures in a timely manner, the Basel Committee said.

Eight EU-based banks are on the latest global list of G-SIBs published by the Financial Stability Board in November 2021: BNP Paribas, Deutsche Bank, Société Générale SA, Crédit Agricole Group, Banco Santander SA, UniCredit SpA, ING Bank NV and Groupe BPCE.

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