SOME banks find existing capital requirements too taxing. To no one’s surprise, on December 23rd Monte dei Paschi di Siena, at present Italy’s fourth-biggest bank, asked the Italian state for help, having failed to raise from the private sector €5bn ($5.2bn) in capital demanded by the European Central Bank before the year’s end. Three days later Monte dei Paschi said that the ECB had redone its sums—and concluded that the stricken lender faced an even bigger shortfall, of €8.8bn.
Plenty of other European banks—in far better nick than poor old Monte dei Paschi, which is overloaded with bad loans—are grumbling that they too may eventually have to find more capital. They have spent years plumping up cushions that the financial crisis showed to be worryingly thin, but fear that proposed adjustments to Basel 3, the latest global standards, will require more. The Basel Committee on Banking Supervision, which draws up the standards, had hoped to agree on the revisions by the end of 2016. It’s not there yet: on January 3rd an imminent meeting of central-bank governors and supervisors, to approve the changes, was postponed.
The amendments are intended to reduce the variation in banks’ own calculations of risk-weighted assets (RWAs), largely by restricting their use of in-house models. Under Basel rules, the ratio of a bank’s equity to its RWAs are a key gauge of its strength: if lenders are too sanguine about risk, their estimated RWAs will be too low and their reported capital ratios misleadingly high.
The main obstacle to an agreement is the committee’s proposal of an “output floor”—a lower bound for banks’ RWAs—calculated as a percentage of the figure churned out by a “standardised” method. The higher the percentage, the tighter the standard: a first version of the proposals suggested 60-90%; a failed compromise last month proposed gradually raising it to 75% over four years, starting in 2021.
American officials like the floor, believing that it limits banks’ ability to play games with the rules. European banks and officials don’t. Both the Association of German Banks and the Bundesbank, for example, want no floor at all. They argue that internal models make capital calculations more, not less, sensitive to risk.
America’s banks would be little affected; several European lenders could be stung. That is partly because America has already installed floors in its domestic rules—and, Americans would add, its banks shaped up faster after the crisis. Europeans retort that it also reflects transatlantic differences in business models. European lenders tend to keep more residential mortgages on their books than American banks, which often sell them on; they also lend more to companies and for project finance. All this may carry heavier risk-weights under the revised rules.
Officials are still aiming for agreement in the first quarter of 2017. That probably means fixing a floor, but how high? Omar Keenan and Kinner Lakhani, of Deutsche Bank, estimate that a 75% floor would increase the RWAs (and hence reduce the capital ratios) of 26 of the 34 listed European banks they cover; at 60%, the number drops to ten, mainly in the Netherlands and Nordic countries.
Phasing in the rules would give banks time to adapt. Under the timetable envisaged by the committee, they would have until 2025—almost two decades after the world’s financial system started to crack. If the stand-off continues, the repairs will take even longer to complete.