Capital requirements to fall for big EU banks due to market integration

Capital requirements for EU-based global systemically important banks will fall in the future as international regulators recognize the progress made in integrating the European banking market.

The Basel Committee on Banking Supervision said May 31 it will adjust the global systemically important bank, or G-SIB, requirements for EU-headquartered credit institutions to reflect the further development of the European banking union project, aimed at creating a single market for all banks in the bloc.

Under the adjusted methodology, all of the banks’ cross-border exposures that fall within the EU will be treated as domestic exposures. This will result in a 66% reduction of the banks’ existing G-SIB scores, the Basel Committee said.

France-based BNP Paribas SA and Germany-based Deutsche Bank AG have the highest scores and, therefore, the highest capital requirements among EU-based G-SIBs, data compiled by S&P Global Market Intelligence shows.

The G-SIB scores are determined by assessing large globally active banks in five equal-weighting categories — size, interconnectedness, substitutability, complexity and cross-border activity. Final scores, measured in basis points, are then mapped in “buckets” that determine their minimum capital ratio requirements. At the end of 2021, Deutsche Bank was required to hold 2% of total risk-weighted assets as an additional common equity G-SIB buffer. BNP Paribas was required to hold 1.5% of total risk-weighted assets.

As of March 31, BNP Paribas ranked second by total risk-weighted assets among European G-SIBs, while Deutsche Bank ranked eighth. In terms of risk density, which is the ratio of risk-weighted assets to total assets and a measure for the overall riskiness of a bank’s balance sheet, both banks ranked toward the middle of the group of 17 lenders, Market Intelligence data shows.

Independent of the impact of the adjusted methodology, BNP Paribas and Deutsche Bank will, from 2023, reverse places in terms of G-SIB capital requirements. BNP Paribas’ buffer will increase to 2% and Deutsche Bank’s will fall to 1.5%. This reversal is based on BNP Paribas’ latest G-SIB score jumping 27 basis points as the French group recorded the strongest year-over-year growth in overall size and cross-jurisdictional activity among all G-SIBs at the end of 2020.

Deutsche Bank, on the other hand, scored lower in size, interconnectedness, complexity and cross-border activity versus a year ago and its overall G-SIB score fell 2 basis points.

The German group expects the Basel Committee’s new methodology for EU-based banks to reduce its score further. “In our calculation, if the EU 27 [member states] … were considered one market, our G-SIB score would be lower because we have … an almost entirely fungible currency, and you get closer to fungible liquidity and fungible capital over time,” Deutsche Bank’s CFO, James von Moltke, told a financial conference June 9.

BNP Paribas was not immediately available for comment.

EU regulators will release more details about the new G-SIB scoring methodology as well as new disclosure requirements for cross-border exposures of the relevant EU-based banks in due course, the Basel Committee said.

There are eight EU-based banks in the latest global G-SIB list published by the Financial Stability Board in November 2021: BNP Paribas, Deutsche Bank, Société Générale SA, Crédit Agricole Group, Banco Santander SA, UniCredit SpA, ING Bank NV and Groupe BPCE.