Financial regulation is a double-edged sword, as there are those in favor of stricter regulation and those who oppose any significant change. New international bank regulations are being drafted, yet Germany is already opposing these guidelines.While these changes are designed to avoid repetition of the 2008 financial crisis, German banks are concerned over lending restrictions.
The Basel IV Rules Cause Concerns For German Banks
Several dozen countries came together to draft the so-called Basel IV rules for the financial system. No one wants a repetition of the 2008 financial crisis, the effects of which are still present this very day. The bailing out of lenders by taxpayers will not be possible moving forward, which seems to be of grave concern to German banks.
To be more precise, various European banks are concerned over the Basel IV guidelines, as they will force major bank reforms. Then again, it is those reforms that the financial sector so desperately needs if another financial crisis is to be avoided. German banks are the biggest proponents of this ruling, though, as they deemed the changes “unacceptable.”
There are concerns over how these changes would discourage financial institutions from lending to both banks and enterprises. The reason for that is simple, as the new guidelines will require an increase in capital required by banks to hedge against financial risks. On paper this change sounds more than welcome, yet it will require a lot of effort to pull it off.
Right now, there are many inconsistencies in capital requirements related to lending purposes. Large banks use their own models rather than following the strict regulations imposed by policymakers. In doing so, they calculate their own credit risks, which is part of the reason why the 2008 financial crisis was made possible to begin with.
At the same time, banks can use these unusual methods to make their own capital ratios appear stronger than they are. Given the recent scrutiny over Deutsche Bank’s practices, it is not unlikely that there may be some truth to the rumors of how this financial institution is going through some trouble. None of that has been officially confirmed at this stage, though.
It is interesting to note that the Basel Committee indicated that their guidelines would not require increased overall capital requirements. Banks feel that these changes would force them to increase capital requirements by as much as 50%. In any case, it appears there is a lot of confusion regarding the exact wording of the Basel IV regulations. Further negotiations will take place in the coming weeks, but it looks like a financial reform is unavoidable.
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