SO CAN WE relax now and sleep easy in our beds? On the basis of the Basel Committee on Banking Supervision and European Banking Authority’s parallel Basel III/CRD IV-CRR monitoring exercises, I’d say yes. The results surely demonstrated beyond reasonable doubt that we no longer need to worry unduly about systemic risk clogging up the arteries of the global banking sector and giving taxpayers a coronary.
OK, there’s still a lot of tidying up and tweaking to do as we head into the TLAC and MREL implementation phases; as we start to confront the realities of Basel IV (including among other things higher leverage ratios); and as we move towards the calibration of final resolution frameworks.
But none of these are major game-changers; they’re iterations, albeit maybe important ones. Put it this way: no-one’s screaming in horror about systemic capital deficits. (While I’m here, they’re also screaming a lot less about self-obsessed casino bankers holding the world to ransom, which is also part of the story).
Basel assessed 221 institutions including 100 so-called “Group 1” internationally active institutions with €3bn-plus of Tier 1 capital. With problem-child exceptions, the banks have done their damnedest and have hit or got pretty damn close to capital, liquidity and leverage targets. And they’ve done so way ahead of deadline.
IT’S WORTH REMEMBERING that all of this has come at a time of major strategic upheaval; against the backdrop of a complex and evolving operating environment; and amid mediocre global economic conditions that have necessitated that pesky zero interest-rate monetary policy environment that’s still in place – witness the Fed’s capitulation last Thursday.
Having quickly scanned the multiple riders, exclusions and assumptions contained in Basel’s copious amount of data points and readings, the results are incontrovertible: all Group 1 banks met both the 4.5% risk-based minimum capital requirements and the 7% CET1 minimum target including the 2.5% capital conservation buffer and the G-SIB surcharge.
Just to put that into context, Basel pointed out that after-tax profits for the same Group 1 banks were €228.1bn. In other words, there’s room for manoeuvre here. Group 2 banks had a shortfall of just €1.5bn at 7%. Wherever you look, the numbers are positive:
• Leverage ratio: The average fully phased-in Basel III Tier 1 leverage ratios are 4.9% for G-SIBs, 5% for Group 1 banks and 5.3% for Group 2 banks. Only 10 banks (three Group 1 banks with an aggregate shortfall of €3.1bn) and seven Group 2 banks (aggregate shortfall of €4.3bn) fail to meet a fully phased-in minimum Basel III leverage ratio of 3%.
• Combined shortfall: with the above in mind, the AT1 shortfall at the minimum level rises from zero to €3.1bn, and from €6.5bn to €8.1bn at the target level. The total capital shortfall considering all capital ratio minimums goes from zero to €3.1bn and from €47.2bn to €48.8bn at target (mainly attributable to G-SIBs). For Group 2 banks, the total capital shortfall at the target level rises from €12.9bn to €15.5bn.
• LCR: the average LCR increased to 125.3% for Group 1 banks and to 143.7% for Group 2. Remember that the LCR was fixed at the start of this year at 60% (with annual 10 percentage point increments layered in to hit the 100% minimum requirement by 2019). Again, for context, the aggregate shortfall at that 2019 floor was €147bn, just 0.2% of the €62trn in total assets of the aggregate sample. The shortfall at 60% was €70bn, barely above 0.1% of bank assets.
• NSFR: the first collection exercise revealed that the weighted average for Group 1 banks was 111.2%, and 113.8% for Group 2 banks. The minimum requirement is 100%. The aggregate shortfall – for banks below 100% and excluding surpluses at banks above 100% – was €576bn at the end of December 2014; €526bn for Group 1 banks and €51bn for Group 2 banks.
At the end of the day this is all so much technical gibberish and claptrap. The much bigger question to everything above is: so what?
IT’S HARD NOT to be impressed with the progress that’s been made. If you look back, the capital shortfall for Group 1 banks has reduced dramatically from a veritable chasm of €485.6bn for CET1, €221.4bn for AT1 and €223.2bn for Tier 2 in the first half of 2011; to zero at the second half of 2014 for CET1, €6.5bn for AT1 and €40.6bn for Tier 2.
Of course, at the end of the day this is all so much technical gibberish and claptrap. The much bigger question to everything above is: so what?
Banks are now a lot more robust and the likelihood of reluctant governments having to bail them out is receding. There are still technical issues to consider – the extent to which the bank funding stack will need to be repriced to take account of the end of the creditor free-ride in the new era of bail-in, for instance – the bigger question is, what are banks going to do with their new-found solidity? The natural tendency will be for them to jealously protect it and keep it prettily wrapped up.
And that’s the nub of the issue: remembering there’s a risk business out there to pursue. Does financing economic growth ring any bells?
