Based on the leaks, hints, winks and tips emanating from the Basel Committee’s meeting last week, it seems like perhaps all the lobbying is working.
That is, the scary parts of the new credit risk approaches won’t happen in anything like their scariest form.
Mortgages won’t be treated so punitively under the standardised approach; corporate and financial exposures will still be treatable under IRB. Specialist business models, like the mortgage banks of Denmark, will be able to keep the lights on.
Of course, credit risk isn’t the only part of the regulatory onslaught. Banks still have to sort out market risk, transparency, market abuse, research, operational risk, TLAC, MREL, SREP, and a million other things.
But credit risk is a solid 70% or more of most banks’ risk weighted assets, so dialling back the regulatory punishment in this area makes a big difference.
That won’t help, however, if the authorities taketh with one hand while they give with the other.
News on Thursday night that the opening bid for Deutsche Bank’s RMBS settlement with the US Department of Justice would be a whopping $14bn rocked the market.
Deutsche moved to reassure its investors that it had no intention of settling for $14bn, but the stock still sold off (DB had roughly $18bn market cap before the news broke) and so did additional tier one.
It’s very probably correct that it doesn’t need to settle for $14bn — even if the DoJ manages to get everything to stick, the final court-ordered figure would likely be lower, and the precedent it sets for all the other European banks waiting to settle their cases would not be encouraging.
So Deutsche has some leverage, in that both parties have an incentive to keep the case out of the courts. Even a 10% chance of dodging a $14bn bullet pays for a lot of lawyers and a lot of appeals.
German regulators are also reported to have lodged a protest with US authorities, but that approach proved little help when BNP Paribas was trying to wriggle out of its $8.9bn sanctions-busting fine.
Whatever eventually happens, the number was radically higher than anyone expected. Deutsche has provisioned around $2bn (a figure which the FT reported would be close to the final settlement), so a figure splitting the difference at $8bn would be enough to blow a huge hole in Deutsche’s balance sheet, and seriously imperil the payment of AT1 coupons.
No wonder John Cryan has been such a ray of sunlight all year — even as markets have picked up, he’s been negotiating this ugly settlement, while trying to drive forward a bank which has seemed stubbornly unable to post the fat profits of old.
Fines or settlements can also have further knock-on effects, beyond the absolute cost. Operational risk capital is based, essentially, on backwards-looking performance. It’s not a great piece of regulatory design, and it means that a big fine is reflected in lower capital ratios for years to come. Even dumber is the fact that other banks’ operational risk capital could get hurt by Deutsche’s settlement. Commerzbank said earlier this year that other banks’ settlements had pushed its tier one ratio down.
Also on the regulatory agenda this week has been a consultation from the French regulator over how the MiFID research rules work. It matters because the AMF and FCA have been locked in a dispute over how to apply the rules, which are supposed to split the costs of research from trading commissions. The FCA is due to publish its own consultation later this month, but by getting in early, the AMF has set out its case for a more lenient approach.
Still missing, though, is anything sensible about how fixed income research will work. The rules were clearly drafted with equities in mind, and regulators are still guessing on how to apply them to markets where it’s the bid-offer spread, not commission, which gets dealers paid.