Forget Brexit, will Basel IV kill your banking job?
Who cares about Brexit? If the omniscient CFO of Deutsche Bank is to be trusted, it's Basel IV you should be worrying about now.
While Brexit was dismissed as giving Deutsche, "something of a competitive advantage," and having "very little impact," by Deutsche's CEO John Cryan last month, CFO Marcus Schenck described Basel IV as an almost eschatological event. As things stand, Basel IV is "humungously draconian" and "would essentially be a complete game changer for the banking industry on this planet," Schenck said dramatically during the bank's second quarter call.
Schenck's statement came in respond to an analyst's question on the likely increase in Deutsche's risk weighted assets (RWAs) following regulatory changes. This is a big issue for Deutsche: by some measures, the German bank is very low on capital. Either it raises more capital, or it cuts the RWAs its capital is measured against. It's trying hard to do the latter, but when Deutsche announced its strategy 2020 last October, it predicted that its €120bn of cuts to RWAs to 2020 would be nearly matched by €100bn of increased RWAs due to tighter regulations.
In other words, Deutsche was always going to be running to stand still. And given that so-called 'Basel IV' regulations were tightened in March 2016, there's now a danger that it will be running to go backwards. Hence (we suppose), Schenck's outburst.
Should you care? Yes, if you work in a business that generates a lot of RWAs, and that could be heavily curtailed if when the new rules come to pass. The hotch potch of new regulations, which have become known as Basel IV include the Fundamental Review of the Trading Book (FRTB), which Deutsche's own analysts predicted last year could increase RWAs in credit trading by up to 90% unless a compromise was introduced (which happened, a bit, in the final iteration). In March, the Basel Committee on Banking Supervision also suggested limiting banks' ability to use their own risk models for loans to institutions and large corporates, preferring standardized models instead. Such standardized models effectively constitute a step backwards to Basel I, according to Cap Gemini. The broad expectation is that they will raise banks' capital requirements (again).
The potential adverse impact of Basel IV is illustrated in the chart below, from Chirantan Barua at Bernstein Research. Unless the new rules are softened further, Barua estimates that UBS and Credit Suisse risk having 600 and 400 basis points respectively knocked off their core tier one capital ratios. Now, imagine that happening to a capital constrained bank like Deutsche.
Fortunately, the expectation is that Basel IV rules will be softened. In reality, Barua thinks UBS will suffer a mere 200 basis point hit and that Credit Suisse will be restricted to a hit of 150 basis points, or so. Nonetheless, there's no guarantee of regulators relenting and until they do, banks like Deutsche seem to be panicking far more about Basel IV than about Brexit, and that's probably something worth worrying about.
Potential impact of Basel IV on core tier one equity ratios at UBS and Credit Suisse
Source: Bernstein Research