What do negative risk weighted assets mean?

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For a long time, US regulators and European authorities have argued about the structure of the stricter capital requirements for banks. Late on Thursday evening, the Basel Committee on Banking Supervision finally published the long-awaited Basel III framework, which is referred to as "Basel IV" due to the high degree of changes in the industry. With the rules, the committee is pursuing the goal of creating a more stable banking system. They were a reaction to the 2008/2009 financial crisis.

The main dispute was the question of the extent to which banks were allowed to use their own models to determine their capital requirements. While internal calculation methods are prohibited in the USA, they are permitted in Europe, which, however, means that banks assess the same credit risks differently.

Capital floor of 72.5 percent burdens banks

This is over now, because banks may continue to use internal calculation models, but the result must correspond to 72.5 percent of the standard approach. The other way around: The financial institutions' scope for design is a maximum of 27.5 percent.

The supervisors are demanding additional capital buffers from systemically important banks: Such institutions receive a 50 percent surcharge on the risk-based part of their buffers. The rules affect all banks in Germany, regardless of their size or business model.

The so-called capital floor of 72.5 percent should no longer surprise the banks, because it had been clear for months that the value would move within this framework. In addition, the final regulations have been greatly relaxed compared to the original drafts.

Basel III: RWA increases of up to 15 percent

For most German banks, this new rule will still cause displeasure, as they have to significantly bolster their equity. So far, many German financial institutions have been using internal models to calculate the risks in their loans and other assets. The calculated risk positions were often well below what the standard risk models would suggest.

Some German institutions will therefore have to reckon with significant increases in their risk-weighted assets (RWA) and lower capital ratios. The auditing company PwC estimates the increases in RWA to be 10 to 15 percent. Some German banks had declared in the past that from a capital floor of 70 percent it could be difficult for them to close the capital holes that then arise.

"Insurance companies, hedge funds or fintechs could take over some banking business."

Regulation affects banking business models

"The planned changes will mean that the banks will have to review the capital requirements in their business areas and, if necessary, adjust their product and pricing structures," says Martin Neisen, Global Basel IV Leader and Partner at PwC Germany. The revised framework will therefore have an impact on the corporate strategy and business models of the banks.

The German banking industry expressed its criticism of the new regulations: “With the establishment of a quantitative lower limit for the approaches based on internal procedures for calculating the capital requirements of 72.5 percent, the Basel Committee for Europe does not miss its self-set target, the capital adequacy requirements to increase significantly. "

Banks are given longer implementation deadlines

It is true that German institutes have good capital resources and can cope with the higher capital requirements. "Nevertheless, it cannot be ruled out that negative consequences for the credit supply for companies and private customers in Europe will occur," said the umbrella association. Competitors of the banks such as insurance companies, hedge funds or fintechs, who could take over some businesses, predicts Martin Neisen from PwC to benefit from the new rules.

There is at least one relief: the banks are given more time to comply with the rules. The reform package will be introduced in stages from 2020 until 2027, and the new standard for market price risks adopted in 2016 will also be postponed to 2020. Even if the time for implementation is still a long way off, the banks cannot sit back now, warns Neisen: “It is obvious that the banks will need a lot of time, effort and considerable resources to see the effects of the reforms understand, implement and manage. "

julia.schmitt [at] finance-magazin.de