The Basel Committee will meet in Switzerland next Tuesday to finalise the rules, paving the way for endorsement of the reforms by leaders of the Group of 20 major nations in November
FRANKFURT (Reuters) – Global regulators, seeking to avoid an effective German veto of proposed new rules for banks’ balance sheets, are likely to reach a deal next week in a dispute over the definition of capital reserves, government and regulatory officials said.
The committee drafting the new “Basel III” rules will meet in Switzerland next Tuesday, paving the way for a final endorsement of the reforms by leaders of the Group of 20 major nations in November.
But in July, Germany was the only member of the Basel Committee of banking supervisors and central bankers that refused to endorse a draft of the rules, saying they did not take into account the special needs of its state-backed banking sector.
Because of Germany’s importance in the global banking industry, its support for Basel III is vital for the reforms to be introduced smoothly around the world.
So regulators have been trying to hammer out a compromise with Germany before Tuesday’s Basel Committee meeting, which is due to decide on new minimum levels of capital which banks will have to hold, and a meeting of the Basel Committee’s oversight body on September 12.
“Decisions will be made relatively fast, September 7 and 12,” Jochen Sanio, president of German regulator BaFin, said in Frankfurt earlier this week.
A spokeswoman for the German Finance Ministry said, “We are confident that we will reach an agreement on the whole package of items on September 12.”
50 BILLION EURO HEADACHE
At the heart of Germany’s objections to the draft Basel III rules is a form of non-voting bank capital known as “silent participations.” This form of capital is common in Germany but is rarely used outside the country.
Because silent participations do not absorb losses as long as a bank is still in business, the Basel Committee wants to exclude them from banks’ new core capital requirements under its reforms, which could force German banks into a difficult and expensive round of raising other forms of capital.
Most of Germany’s silent participations comprise state funds, provided as part of ownership agreements for publicly owned banks or as state bailouts during the financial crisis.
“A quarter to a third of the capital reserves of German savings banks, cooperative banks, private banks and landesbanks come in the form of silent participations, adding up to a little less than 50 billion euros ($64 billion) altogether,” said Karl-Heinz Boos, executive managing director of the Association of German Public Sector Banks (VOEB).
“There is no way these banks could find a substitute quickly.”<---Some trying to throw Germany under the bus again???
Katharina Barten, analyst at credit ratings agency Moody’s Investors Service, agreed.
“Some landesbanks may be challenged to ensure adequate capitalisation, considering that some support measures were provided in the form of risk shields as well as their limited access to equity capital markets,” she said.
This could lead to a shortfall in loans to companies and municipalities in Germany of 300-400 billion euros, if the banks, unable to raise equity on capital markets, have to shrink their balance sheets to prop up core capital ratios, Boos said.
LONG TRANSITION
Germany is willing in principle to accept changes in the design of silent participations, allowing them to be impacted by losses in the same way as equity is. At present, they do not come into play until after a bank’s entire equity has been swallowed by losses.
Silent participations also receive a coupon payment, which is usually deferred if a bank posts losses. Berlin has now proposed that the coupons be cancelled in the case of losses, just as dividends on shares usually are, sources familiar with the negotiations said.
“The owners of some forms of hybrid capital — for example silent participations — will have to agree to take higher risks to comply with the new Basel rules…It should be a manageable problem,” said Ullrich Hartmann, regulatory expert at auditing firm PricewaterhouseCoopers.
But in exchange for these concessions, Germany wants a long transition period for the changes to silent participations beyond the end of 2012, when banks are expected to have to begin obeying aspects of Basel III.
“For this we need a transition period until 2040,” Boos said.
Such an extreme transition period looks unlikely to many experts. But they think the Basel Committee will probably agree on shorter “grandfathering” or phase-in clauses for the silent participation reforms, perhaps of 15 to 20 years.
The committee faces heavy political pressure to keep the regulatory reform process proceeding smoothly, so that governments can say they are delivering on pledges to prevent any repeat of the global credit crisis.
“It is a purely political decision,” said one investment banker, who declined to be named, adding that failure to agree on a compromise with Germany could derail the whole Basel process.
Earlier this year G20 leaders agreed in principle that there should be a lengthy phase-in for aspects of the Basel III reforms beyond 2012, but they did not specify a timetable. This month’s meetings of regulators are expected to fill in details of the timetable.
FRANKFURT (Reuters) – Global regulators, seeking to avoid an effective German veto of proposed new rules for banks’ balance sheets, are likely to reach a deal next week in a dispute over the definition of capital reserves, government and regulatory officials said.
The committee drafting the new “Basel III” rules will meet in Switzerland next Tuesday, paving the way for a final endorsement of the reforms by leaders of the Group of 20 major nations in November.
But in July, Germany was the only member of the Basel Committee of banking supervisors and central bankers that refused to endorse a draft of the rules, saying they did not take into account the special needs of its state-backed banking sector.
Because of Germany’s importance in the global banking industry, its support for Basel III is vital for the reforms to be introduced smoothly around the world.
So regulators have been trying to hammer out a compromise with Germany before Tuesday’s Basel Committee meeting, which is due to decide on new minimum levels of capital which banks will have to hold, and a meeting of the Basel Committee’s oversight body on September 12.
“Decisions will be made relatively fast, September 7 and 12,” Jochen Sanio, president of German regulator BaFin, said in Frankfurt earlier this week.
A spokeswoman for the German Finance Ministry said, “We are confident that we will reach an agreement on the whole package of items on September 12.”
50 BILLION EURO HEADACHE
At the heart of Germany’s objections to the draft Basel III rules is a form of non-voting bank capital known as “silent participations.” This form of capital is common in Germany but is rarely used outside the country.
Because silent participations do not absorb losses as long as a bank is still in business, the Basel Committee wants to exclude them from banks’ new core capital requirements under its reforms, which could force German banks into a difficult and expensive round of raising other forms of capital.
Most of Germany’s silent participations comprise state funds, provided as part of ownership agreements for publicly owned banks or as state bailouts during the financial crisis.
“A quarter to a third of the capital reserves of German savings banks, cooperative banks, private banks and landesbanks come in the form of silent participations, adding up to a little less than 50 billion euros ($64 billion) altogether,” said Karl-Heinz Boos, executive managing director of the Association of German Public Sector Banks (VOEB).
“There is no way these banks could find a substitute quickly.”<---Some trying to throw Germany under the bus again???
Katharina Barten, analyst at credit ratings agency Moody’s Investors Service, agreed.
“Some landesbanks may be challenged to ensure adequate capitalisation, considering that some support measures were provided in the form of risk shields as well as their limited access to equity capital markets,” she said.
This could lead to a shortfall in loans to companies and municipalities in Germany of 300-400 billion euros, if the banks, unable to raise equity on capital markets, have to shrink their balance sheets to prop up core capital ratios, Boos said.
LONG TRANSITION
Germany is willing in principle to accept changes in the design of silent participations, allowing them to be impacted by losses in the same way as equity is. At present, they do not come into play until after a bank’s entire equity has been swallowed by losses.
Silent participations also receive a coupon payment, which is usually deferred if a bank posts losses. Berlin has now proposed that the coupons be cancelled in the case of losses, just as dividends on shares usually are, sources familiar with the negotiations said.
“The owners of some forms of hybrid capital — for example silent participations — will have to agree to take higher risks to comply with the new Basel rules…It should be a manageable problem,” said Ullrich Hartmann, regulatory expert at auditing firm PricewaterhouseCoopers.
But in exchange for these concessions, Germany wants a long transition period for the changes to silent participations beyond the end of 2012, when banks are expected to have to begin obeying aspects of Basel III.
“For this we need a transition period until 2040,” Boos said.
Such an extreme transition period looks unlikely to many experts. But they think the Basel Committee will probably agree on shorter “grandfathering” or phase-in clauses for the silent participation reforms, perhaps of 15 to 20 years.
The committee faces heavy political pressure to keep the regulatory reform process proceeding smoothly, so that governments can say they are delivering on pledges to prevent any repeat of the global credit crisis.
“It is a purely political decision,” said one investment banker, who declined to be named, adding that failure to agree on a compromise with Germany could derail the whole Basel process.
Earlier this year G20 leaders agreed in principle that there should be a lengthy phase-in for aspects of the Basel III reforms beyond 2012, but they did not specify a timetable. This month’s meetings of regulators are expected to fill in details of the timetable.