European banks face large capital shortfall with Basel III rules, study shows

European banks could need as much as 400 billion euros ($442 billion) in capital to comply with new rules aimed at making the global financial system better able to bear potential losses, a study commissioned by the European Union’s banking lobby showed.

Under the new rules, which are known as Basel III, an “output floor” would limit the extent to which a bank’s capital buffers, calculated according to the lender’s own risk models, can differ from levels where they would stand under more conservative standard models.

The aim of the Basel III rules, which the EU agreed with the United States, is to increase banks’ ability to withstand financial shocks.

The study by Copenhagen Economics, which will be published later on Thursday, was commissioned by the European Banking Federation and a group of national banking lobbies to analyze the impact of the Basel III banking rules before they become law in Europe. Italy’s banking lobby provided a copy of the study to reporters.

The study also warned about the impact on the real economy, saying the new rules would translate into higher borrowing costs for households and businesses.

Even after accounting for a marginal benefit on output growth from a safer financial system, the study pointed to a net cost in terms of lost growth equivalent to 0.4 percent of gross domestic product on the back of a decline in investments.

EU Finance Commissioner Valdis Dombrovskis, who recently voiced concern about the risk of a significant increase in banks’ capital requirements under the new rules, said last week the EU Commission aimed to put forward a proposal in the second quarter of 2020 to turn those new rules into EU law.

The European Banking Authority said in July that Europe’s leading lenders could collectively face a shortfall of 135 billion Euros – or 24.4 percent increase in their required core capital – to meet the new global capital rules by 2027. 

[Reuters]