European banks led by BNP to benefit from Basel rule change

EUROPEAN banks led by BNP Paribas stand to benefit after global regulators agreed to start treating the euro area as one market in determining capital requirements for its top lenders.

Banks headquartered in Europe’s banking union, which encompasses mainly the countries that share the euro, would see cross-border exposures within the bloc treated as domestic ones, which are considered less risky, according to documents from the Basel Committee on Banking Supervision seen by Bloomberg. 

BNP Paribas stands to benefit the most because it has the highest surcharge of all systemically important lenders in the bloc and would likely see a reduction in capital requirements. The planned changes, expected to be announced as soon as Tuesday, could also facilitate cross-border takeovers, since they would allow banks to do deals in the bloc without automatically facing the threat of stricter capital demands.

European bank stocks rose as the decision marks a win for lenders that have long argued regulators and investors should view the bloc as a unified market since, like the US, it shares a common currency and has a joint central bank, supervisor and resolution framework. It also dangles relief, just as Russia’s war in Ukraine forces lenders in the region to set more money aside for troubled credit and prepare for the prospect of a long-lasting economic shift.

BNP Paribas gained 1.9 per cent at 4,48 p.m. in Paris trading, and an index of European lenders rose 0.6 per cent after trading little changed earlier.

The spokespersons for the Bank of International Settlements, which handles communication for the Basel Committee, and for the European Central Bank, which oversees the euro area’s biggest banks, declined to comment. A spokeswoman for BNP Paribas also didn’t want to comment.

The ECB had argued that progress in the decade-long effort to create a banking union should be reflected in capital surcharges for so-called global systemically important banks. The agreement at the Basel Committee allows capital requirements to be lowered by a maximum of one notch for lenders in the banking union, if the new way of calculating risk warrants such a move. It won’t affect the classification of any banks as systemically important.

BNP Paribas and Deutsche Bank are the only banks that could currently be assigned a lower surcharge because all other large firms in the region are in the lowest bucket already. 

BNP would see its buffer requirement fall by 0.5 percentage points, while Deutsche Bank would remain in the current bucket for capital requirements, according to confidential calculations by the ECB based on data as of the end of 2020. UniCredit and ING Groep also stand out as major beneficiaries in the ECB’s analysis.

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Regulators require banks to set aside capital to absorb potential losses, but those buffers reduce lenders’ ability to return funds to shareholders via dividends and stock buybacks, making them less attractive as investments.

The list of global systemically important banks is published once a year by the Financial Stability Board based on data from the end of the previous year. It currently includes 30 lenders. A spokeswoman for the FSB declined to comment. 

The Basel Committee, which sets global standards for banking regulation, brings together officials from the ECB, Federal Reserve, Bank of England and other institutions.