A report from KPMG, Banks’ capital: myths and realities, unpacks six common myths about capital regulation and its impact on banks. The myths are:
1) There is no Basel 4
2) Regulatory reform is almost over
3) International standards provide a level playing field
4) Banks are in a strong position because they have met Basel 3 requirements
5) Banks with stronger capital ratios lend more
6) Capital markets can fill the gaps left by banks
Giles Williams, Partner, Financial Services, KPMG UK, sets the record straight:
“It’s a myth to say that there is no Basel 4. There is, and it will increase capital requirements and funding costs, which will impact banks’ ability to lend and therefore hit the wider economy.
“It has been almost a decade since the start of the financial crisis, and the existing pipeline of regulation is still far from completion – that’s without even considering new rules that will emerge as business models change and technology evolves. Regulatory compliance dominates bank’s priorities; strategic thinking and innovation need to be at the forefront.”
Myth: There is no Basel 4
KPMG expects the series of measures being introduced as ‘the finalisation of Basel 3’ to increase capital requirements of international banks by €350 billion or reduce their balance sheet assets by around €7 trillion.*
Myth: Regulatory reform is almost overIn reality there is still a long way to go before existing regulations are complete, loading further costs and uncertainties on banks. In addition to existing regulations there are several unknowns likely to keep the agenda going, such as potential new macro-prudential tools, further work on the sale of retail products or new regulation in response to business model and technology advances.
Myth: International standards provide a level playing field Regulations are not being implemented consistently. This is nothing new, Basel 1 and Basel 2 were never implemented in a consistent manner but today’s divergences are more significant.
Myth: Banks are in a strong position because they have met Basel 3 requirements Although banks have generally met Basel 3 they are still in a weak position because many are yet to meet the additional requirements of Basel 3 (Basel 4), and they still have low profitability, especially in Europe.
Myth: Banks with stronger capital ratios lend moreIn Europe bank’s capital ratios have risen sharply whilst lending has stayed flat. Elsewhere, banks are benefiting from being able to build capital from profit retention and profitable lending.
Myth: Capital markets can easily fill the gaps left by banks
Capital market finance will not replace bank lending in Europe quickly. The future of the Capital Markets Union project is up for debate following the result of the UK referendum, but it is clear that Europe needs to make its capital management work better for the benefit of the wider economy.
The CET1 capital and the RWAs of the 100 major international banks in the Basel Committee’s monitoring exercise sample totalled around €3.5 trillion and €30 trillion respectively at end-June 2015. If the Basel Committee proposals generated a 10 percent increase in RWAs then these banks would have to increase their CET1 capital by €350 billion to maintain their capital ratios; or alternatively reduce their RWAs by €3 trillion.
For further information contact:
Christina Bridge, Corporate Affairs Manager
T: +44 207 311 4252
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