Europe’s decision to delay implementation of a key aspect of tougher capital rules for banks is a negative from a credit perspective, says Moody’s Ratings.
On June 18, European policymakers said they had decided to push back the deadline for adopting provisions of the Basel III capital regime that deal with market risk in banks’ trading books until Jan. 1, 2026 from the previous planned implementation date of Jan. 1, 2025.
The decision to delay that aspect of the new capital rules — which were developed in response to the global financial crisis — came amid expectations that U.S. regulators won’t be adopting their final version of the Basel III reforms until 2026. European officials indicated they’re concerned that this could leave European banks at a competitive disadvantage to their U.S. rivals.
However, that decision may not be a good thing for the banks’ credit ratings.
“The delayed introduction of stronger capital buffers to absorb banks’ market risk losses and improve protection for their creditors is credit negative,” Moody’s said in a research note.
Among other things, the new rules for market risk aim to:
- reduce arbitrage between the banking and trading books, which are subject to different capital charges;
- better address tail risks that are not properly captured under the current approach; and
- introduce a new, more risk-sensitive standardized approach to calculating capital requirements.
“Market risk rules are particularly relevant for large investment banks given their global capital market activities,” Moody’s said.
At the same time, the delay casts doubt about whether regulators will be able to implement Basel III “in a timely and consistent way,” it said — noting that U.S. regulators have also signalled that their final requirements may still be revised amid intense lobbying by U.S. banks.