The world's largest banks are into the homestretch of a longcampaign to convince politicians and regulators that plannedchanges to their capital requirements will suffocate the industryand imperil lending and growth. All that lobbying is paying offwhen it counts.

The Basel Committee on Banking Supervision will hold threecrucial meetings in the next two weeks as it races to wrap up thepost-crisis capital framework by the end of the year. The bankswarn that proposed changes in how they assess risk would sendcapital requirements spiraling, and key policy makers from Europeto Japan are heeding their message.

The banks' lobbying success was on display this week. AndreasDombret said the Bundesbank, where he's in charge of financialsupervision, had considered the industry's arguments and concludedthat “there is a need to recalibrate” the Basel proposals. TheEuropean Union's top two officials then insisted in a positionpaper before the Group of 20 summit Sept. 4-5 that the BaselCommittee stick to its promise not to increase capital requirementssignificantly as it refines risk measurement.

“The banks feel that there is a tactical opening right now forthe politicians to deliver a more favorable outcome than what hasresulted so far from the technocratic process,” said Nicolas Veron,a senior fellow at the Bruegel think tank in Brussels. “Banks indifferent markets and geographies have differing objectives, butthere is coordination.”

Lobbying Power

The pressure on the Basel Committee, whose members include theBundesbank and the U.S. Federal Reserve, marks a comeback in banks'lobbying power after they were cast as pariahs for years after the2008 financial crisis. The industry says proposed revisions tothe rules for assessing credit, operational and market risks, aswell as limits on banks' use of their own models to make thesecalculations, would hinder their ability to help fuel economicexpansion.

The proposals now on the table could result in an overallincrease of as much as 70% in the capital banks must have,according to Shunsuke Shirakawa, vice commissioner forinternational affairs at Japan's Financial Services Agency, anotherBasel member. That's in line with the upper end of some industryestimates. Shirakawa said the Basel Committee needs to “makeadjustments” to bring the new rules in on target.

The Basel Committee meets on Friday in Frankfurt and again Sept.14-15 in Basel. In between, the regulator's oversight body is setto convene. Progress at these meetings toward a consensus on thecapital-rule revisions will be crucial for meeting the year-enddeadline.

If the EU's position paper issued by Jean-Claude Juncker, headof the European Commission, and European Council President DonaldTusk, is any guide, G-20 leaders meeting in Hangzhou, China, mayput additional pressure on the Basel Committee to moderate theimpact of the rule changes.

“There is growing consensus not only within the private sector,the industry, but within the regulatory community that the originalproposals as presented were not fulfilling the mandate of notsignificantly increasing overall capital,” said Andres Portilla,managing director for regulatory affairs at the Institute ofInternational Finance, a global trade group. “Hence there was aneed to revise those proposals. That's what we understand the BaselCommittee is doing at present.”

Complex Models

The lobbying onslaught by bankers intensified over the summer asthey fanned out across Europe to drive home the point that theBasel Committee had gone too far in clamping down on how banksassess risks from loans, mortgages and even cyber-crime in anattempt to prevent them from using complex models to game capitalrules.

The French Banking Federation and Association of GermanBanks teamed up in June and July to oppose the proposals,which they said would inflate capital requirements with“unprecedented consequences” for the economy. For the firsttime, the groups, which represent banks including BNP Paribas SAand Deutsche Bank AG, delivered a joint message to French FinanceMinister Michel Sapin, and then met with his German counterpart,Wolfgang Schaeuble.

In Frankfurt, bankers met privately with Bundesbank officials,according to a person with knowledge of the talks. The Bundesbankshared an estimate the Basel measures would have on Germany'sbanking industry showing that the impact would be widely spreadacross banks of different business models and size, the personsaid, declining to provide specifics.

While the Bundesbank told bankers that it shared some of theirconcerns, it cautioned that its capacity to tone down the Baselproposals was limited, the person said.

A spokeswoman for the Bundesbank said meetings are heldfrequently with bankers to discuss regulatory measures, anddeclined to comment on specific meetings.

Valdis Dombrovskis held three meetings with powerful industrytrade groups on a trip to Washington in July, days after he tookover as the EU's financial-services chief. For more than a year,bank executives have insisted that the work under way at Baselis so far-reaching that it amounts to a new wave of regulation— Basel IV.

The Basel Committee takes a different view, referring to theprocess rather as the refinement of the current framework, BaselIII.

“The term Basel IV is a pure propaganda move by the banks,” saidMartin Hellwig, director of the Max Planck Institute for Researchon Collective Goods in Bonn, Germany.

Market Risk

Global industry groups such as the IIF, the International Swapsand Derivatives Association and the Global Financial MarketsAssociation commissioned impact assessments to back uptheir claims.

A European Banking Federation analysis of market estimates showsan increase in capital requirements of 600 billion euros to 900billion euros ($671 billion to $1 trillion) for the Europeanbanking sector. The consensus of the estimates is this would mean a55% increase in regulatory capital for the sector, according to theEBF.

The industry also latched on to the question of the levelagainst which Basel's promise should be measured, arguing thatimpact of market-risk rules issued in January should befactored into the increase, not the baseline. That would probablylead to a higher impact estimate and make it easier to argue thatBasel was breaking its pledge.

“Our expectation is that at the end, the final framework willrespect the boundaries and the mandate that was given,” the IIF'sPortilla said. “We're all confident that that will be the outcome,but obviously we need to see the final package.”

Portilla and others in the industry should be encouraged by thestatements coming from the politicians and regulators as the BaselCommittee runs up against its year-end deadline.

As Dombret said: “The Bundesbank will make Basel III a priorityfor the second half of this year, working very closely withindustry.”

Bloomberg News

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