New Basel rules may be a burden on banks

As the new rules for capital requirements are finalised by the Basel Committee, experts warn they may be more costly than previously anticipated

Swiss Franc banknotes. The Basel Committee's latest banking regulations could cost banks millions to implement  

A series of recently finalised banking regulations may end up costing banks tens of millions of euros each to implement.

The new standards, set by the Basel Committee on Banking Supervision and designed to reduce the risk among banks buying and selling client securities, could, according to a report by the consultancy group Oliver Wyman, cost each financial institution between €40m and €120m each to implement.

The rules are intended to dampen the chances of banks taking on too much risk to their own books when buying or selling securities from clients. This will require banks to increase their market risk capital in the hope of staving off the potential for financial collapse.

The requirements, in following much more stringent previous drafts of the regulation, have been seen as less draconian than previously feared. Whereas in late 2015, some were predicting that banks would be required to increase their market risk capital by an average of 74 percent, that number, in the finalised draft of the new regime, would only require banks to boost capital requirements by a median rise of 22 percent, according to the Basel Committee.

However, according to the Oliver Wyman report, the impact of the new regulations has been severely underestimated. According to Oliver Wyman Partner Rebecca Emerson, “It’s one of the most expensive regulatory programmes that banks are currently dealing with,” reported the Financial Times. Emerson also noted that, based on conversations with clients, banks have largely diverging estimates for how much it will cost to implement the newly minted rules.

Part of the reason why the regulation will be so costly is due to it requiring banks using internal risk models to have them approved by regulators desk-by-desk, rather than being able to have them agreed on a business-wide basis.