ECBC to tackle RWA floors, Realkreditrådet calls for ‘disconnect’ from Basel

The European Covered Bond Council will in the coming months focus on addressing the impact of risk-weight floors for mortgages being proposed by the Basel Committee, which representatives of the Danish FSA and issuers questioned at an ECBC plenary yesterday (Thursday).

The Basel Committee on Banking Supervision (BCBS) has proposed minimum risk-weight floors for residential mortgages for banks using the Internal Ratings-Based (IRB) approach under a raft of measures that have been dubbed “Basel IV”. The levels being floated for the floors are generally significantly higher than those being used by banks working with IRB models.

Opening the European Covered Bond Council plenary in Copenhagen this morning, ECBC chairman Waleed El-Amir (who is head of group finance at UniCredit) said that this poses “a big challenge for our industry” and that the ECBC steering committee will focus on the issue in the coming months.

Ane Arnth Jensen, managing director of the Association of Danish mortgage banks (Realkreditrådet), said that the industry has reason to be worried about the Basel Committee’s proposals. She said that the proposals are counterintuitive given the Basel Committee’s other initiatives and could incentivise riskier practices. Jensen also warned that mortgage costs will rise and that there is a risk mortgage lending will be removed from the financial sector, which will be negative for society.

She noted that “the Basel Committee do not love covered bonds”, in spite of their resilience during the financial crisis, and said that the EU should “disconnect” from the “private club” and make its own decisions. She said the onus is on EU politicians to say “enough is enough”, given how the financial industry is coping with higher regulations, and that the European agenda has supposedly moved on to growth initiatives.

Jesper Berg (pictured), director general of the Danish FSA (Finanstilsynet), said that the Danish regulator supports risk-based capital requirements, with risk exposure amounts (REAs, a relatively new term for risk-weighted assets (RWAs)) based on the “actual differences in risk”. He acknowledged that minimum capital floors can be useful, but said that careful calibration is needed to avoid a skewing of incentives.

However, while the Danish FSA believes in IRB modelling, he added, it will continue to be sceptical of fine-tuning in modelling by banks that can lead to significant reductions in REAs. He warned that this could destroy confidence in such models.

Jensen said that the answer to such risks is for supervision of IRB models to be strengthened.