Basel Capital Rules Stand

Deutsche Bank, UniCredit lose argument that requirement could stunt economic growth.

Deutsche Bank AG, Germany’s biggest lender, and UniCredit SpA are among European banks that may have to raise additional capital after regulators dismissed lenders’ threats that stiffer rules may stunt economic growth.

Regulators meeting in Basel this weekend agreed to make as many as 30 of the world’s largest, or systemically important, banks hold as much as 2.5 percentage points more capital than the 7 percent core Tier 1 capital required. They also blocked European banks’ requests to use hybrid capital, such as contingent convertible bonds, to meet the target. The biggest banks will use mostly retained earnings and ordinary shares.

Lenders had lobbied against the extra capital requirements, saying they risked stunting the global economic recovery and some had sought to avoid being categorized as systemically important. The decision marks a loss for European banks that are grappling with the region’s debt crisis and had sought to use hybrid capital to meet regulators’ extra requirements.

“It’s likely to be the catalyst for the last wave of capital raisings, with UniCredit, Deutsche Bank and the top three French banks needing to boost capital,” said Christopher Wheeler, a banking analyst at Mediobanca SpA in London. “The winners are the U.S. banks.”


Combined Shortfall
Deutsche Bank spokesman Ronald Weichert declined to comment beyond remarks by Chief Risk Officer Hugo Banziger on June 10, when he said the bank was “confident” of meeting the Basel III capital requirements. UniCredit spokesman Andrea Morawski referred to Chief Executive Officer Federico Ghizzoni’s comments on June 17, when he said the lender could handle a 2 percent surcharge through retained earnings alone. Spokeswomen for France’s biggest banks -- BNP Paribas SA, Credit Agricole and Societe Generale -- all declined to comment.

The banks, together with Banco Santander SA and Credit Suisse Group AG, will have a combined 62 billion-euro ($88 billion) capital shortfall, according to Mediobanca. Spokesmen for Credit Suisse and Santander declined to comment.

The decision was part of the Basel Committee’s overhaul of rules on how much capital the world’s largest banks should hold so they don’t collapse during a financial crisis. The proposals will be reviewed by the Financial Stability Board and then be issued for public comment, the Basel group said. The FSB, which brings together finance ministry officials, central bank governors and regulators from the Group of 20 countries, is leading efforts to rein in systemically important banks.


‘They Lost’
“Europeans were pushing for a mix of common equity and contingent capital and they lost at a global level,” said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., a bank consulting firm. “The capital requirements for the biggest banks have now gone from as low as 2 percent before the crisis to well north of 10 percent. The banks are going to have to constrain activities both by reducing risk and denying credit.”

The Basel committee didn’t identify which banks will be subject to the capital charges. About 28 to 30 banks, including as many as eight in the U.S., may face the surcharge, according to a person familiar with the situation, who declined to be identified because the talks are private.


‘Total Failure’
HSBC Holdings Plc, Bank of America Corp., Citigroup, Deutsche Bank, BNP Paribas, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc may be subject to the surcharge of 2.5 percent, Morgan Stanley analyst Huw van Steenis said on June 19. UBS AG, Credit Suisse, Goldman Sachs Group Inc. and Societe Generale would be subject to a lower charge of 2 percent, the analyst said.

“The vote ignores the total failure of the QE2 thrust in the United States to stimulate this country’s economy, a failure caused by the stringent capital and liquidity ratios already in place on American banks,” Lutz, Florida-based Richard Bove, an analyst at Rochdale Securities LLC, said in a note to clients. QE2 is the U.S.’s second program of quantitative easing,

Banks should be pressed to meet the higher capital requirements before a series of deadlines starting in 2013 unless earlier introduction of the rules would threaten lending, the Bank for International Settlements said in its annual report yesterday.


CoCos Criticized
“The Basel Committee has given banks until 2019 but the equity markets will expect them to react much sooner, maybe by 2012 or 2013,” said Kinner Lakhani, a banking analyst at Citigroup Inc. in London. “If Basel decides in two years’ time to permit contingent convertibles, there is a risk that it will be too late.”

The securities, which convert into equity at a given trigger, have been criticized by Oswald Gruebel, chief executive officer of Switzerland’s biggest bank, UBS AG, for diluting regular shareholders’ investments. The Basel Committee said it would continue to study them and that banks could use the securities to meet national capital rules that are even stricter than the Basel III rules.


Lobbying Efforts
UniCredit, Italy’s biggest lender, rose 0.5 percent to 1.37 euros by 1:20 p.m. in Milan, valuing the bank at about 26.4 billion euros. The bank will need to raise 6 billion euros, according to the median estimate of 20 analysts surveyed by Bloomberg earlier this month. Deutsche Bank fell 0.3 percent to 39.34 euros, while Societe Generale slid 0.5 percent to 37.57 euros. BNP Paribas was 1 percent higher at 49.71 euros while Credit Agricole dropped 0.7 percent to 9.60 euros.

“Investors have no appetite for buying into companies that are at the whim of economically challenged legislators and regulators, unable to raise their dividends and who must lower their returns on equity,” Bove said.

Banks have already started to ramp up lobbying to limit how much capital they are required to hold. Individual banks are also trying to escape the “too-big-to-fail” label, Federal Deposit Insurance Corp. Chairman Sheila Bair told U.S. lawmakers June 22.

The U.S. bank lobbying campaign intensified this month when Jamie Dimon, JPMorgan Chase’s chief executive officer, publicly challenged Fed Chairman Ben S. Bernanke on whether regulators have gone too far and are slowing economic growth.

“It’s essential to take into account the cumulative effect of the extensive regulatory changes already under way,” said Michael Lever, a managing director at the Association for Financial Markets in Europe lobby group. The changes “mean that risks posed by systemically important financial institutions have been substantially reduced since the financial crisis.”


Bloomberg News



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