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BANKING : SENIOR BANKER WARNS AGAINST EXCESS CAPITAL RULES.

The author of the high-level report on banking supervision, Jacques de Larosiere, has warned European regulators against imposing too many new capital requirement rules on banks. In an article published by The Financial Times on 15 october, the former Banque de France president said that "Regulators must not start piling new (capital) ratios on the existing ones. Each of the new measures may have, individually, some rationale. But together their impact could prove lethal". The de Larosiere report, published in February, led to the European Commission's September package on financial supervision (see Europolitics 3824). The proposals will create a controversial new EU risk watchdog, the European Systemic Risk Board (ESRB), which will closely monitor the whole of Europe's financial system, across sectors and countries, and act as an early warning system.

The capital requirements of banks are set by the Basel Committee rules laid down in the EU Capital Requirements Directives. The crisis of October 2008 highlighted the fact that existing Basel II rules had allowed financial institutions to leverage debt to sums many times their real capital holdings. The rules have now been revised (see below) but de Larosiere is concerned that a backlash to stricter rules could cripple the whole sector. He emphasised that risk must be the overriding factor in setting bank capital needs: "Imposing a non risk-based leverage ratio could entail serious negative, albeit unintended, consequences," he said. He warned against a one size fits all' approach, which did not take into account the specifics of many European banking business models.

BASEL COMMITTEE FINDINGS

De Larosiere's comments follow the publication of hard-hitting data from the Basel Committee, the body that sets capital requirement rules. The Basel Committee and IOSCO (the International Organisation of Securities Commissions) brought in new rules on trading book capital requirements in July this year. An impact study, published on 15 October and based on data from 43 banks across ten countries, looks at the likely impact of the new rules. Key findings show that, on average, banks will have to increase their overall capital holdings by at least two to three times their current levels.

The old Basel II rules had allowed banks to calculate their capital needs without taking into account certain key risks. The revised regime, which applies internationally, will improve this by including incremental default risk, the risk, calculated over a certain period, that debt bought by banks might lose its market value.

The Chairman of the Basel Committee, Nout Wellink, said the reforms were necessary because "increasingly complex trading book exposures were a major driver of losses in the recent crisis". The revisions, he said, would ensure that in the future, debt taken on by banks would be backed by a sufficient capital cushion, helping to address procyclicality and limit arbitrage.

The report is available at www.europolitics.info > Search = 258746a

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Publication:European Report
Date:Oct 20, 2009
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