Since the financial crisis of 2008, banks have already significantly improved their capitalization. On average, the Common Equity Tier 1 ratio for the 50 largest European banks is just under 14%. Hardly any important financial institution is threatened today by a lack of sufficient capitalization. In addition, European regulators also prescribe the SREP buffer, which varies from institution to institution, but results in capital premiums for all institutions, some of which go far beyond the Basel standards.
This means that the capital basis is already secured today. It may sound reasonable to adapt the calculation model internationally, because banks can also use internal models to sugarcoat their own risk profile. This applies, for example, to “low default portfolios”, i.e. receivables from governments, banks or large companies. There, the data basis is often not enough to reliably predict the probability of default or loss. Accordingly, more conservative estimates are essential here.
However, high volume business, such as construction financing and financing for small and medium-sized enterprises (SMEs), accounts for the lion’s share of business in Europe. There is sufficient data (high default portfolios) and well-founded calculation models on business with this pillar of the European economy, which the current form of Basel IV painfully restricts.
This is likely to throw Europe’s banks even further back. The previous strengthening of equity and the prolonged period of low interest rates are putting considerable pressure on banks’ profitability as it is. On average, Europe’s largest banks do not cover their cost of equity, so they are already lagging significantly behind their US competitors. If the supervisory authorities increase the capital requirements, it could jeopardize the very existence of some institutions.
It is therefore important that regulators reduce this risk when transposing the Basel requirements into European law. One way to do so would be to include the SREP surcharges that only exist in Europe in their calculations. This would hardly increase capital requirements, but the security of the system would continue to be guaranteed.