New Basel risk rules will hinder corporates, says GFMA

Host of different lending avenues will be affected by plans to restrict banks’ internal risk frameworks, says organisation

Basel Committee plans to impose changes on banks’ internal risk frameworks could backfire, severely restricting the types of financial services available to corporate clients.

That’s according to the Global Financial Markets Association (GFMA), which has issued its formal response to the proposals.

Published on 21 June, the response homes in on measures outlined in a March consultation paper from the Committee, in which it announced its aims to:

1. Remove the option that banks currently have to use internal ratings-based (IRB) approaches for certain risk exposures, in cases where the parameters cannot be estimated with sufficient reliability for regulatory capital purposes;
2. Enforce exposure-level, model-parameter floors to ensure minimum levels of conservatism for portfolios where IRB approaches remain available; and
3. Reduce variability in risk-weighted assets (RWA), also for portfolios where the IRB approaches remain available.

Written in partnership with the International Swaps and Derivatives Association, the International Association of Credit Portfolio Managers and the Japan Financial Markets Council, the response criticises the Committee’s objectives – and timing.

“The current proposals amount to the most significant conceptual change that has taken place since the advent of Basel II and, rather than improve the measurement and understanding of risk, are more likely to do the opposite,” it said.

“The removal of risk sensitivity,” explained the response, “will distort capital allocation decisions, origination incentives and pricing to the detriment of banks’ customers and the global economy.”

In particular, it warned: “Corporates are likely to suffer restrictions on the availability of many banking services and products needed to support their commercial activities and hedge financial risks.

“Corporate lending, capital markets activity – including derivatives and short-term, secured financing – project finance deals, aircraft and shipping finance and commodities finance, all necessary forms of finance to support investment and economic activity, will all be extremely affected by the proposals.”

Furthermore, it noted, “economies where market financing is still developing are likely to feel these effects more acutely. Consequently, we view these proposals as being inconsistent with the pursuit of the growth agenda at global level.”

The signatories also expressed concerns that the cumulative effects of the current suite of Basel Committee proposals are all leading to increased RWA levels.

Since the global economic crisis, the response added, “there have already been significant increases in capital requirements through the Basel II.5 and the 2010 Basel III reforms.

“These increases in capital requirements were necessary and have improved the stability of the financial system – but there are decreasing marginal benefits for society from yet higher requirements.”

Download the full response via this link.