However, we should stress that the latest proposal from the Basel Committee contains several recommendations other than the output floor requirement. We need to familiarise ourselves with these other parts of the proposal before we can make a final conclusion as to the implications for Danish credit institutions.
Finance Denmark basically still opposes the introduction of a floor requirement, and we will continue our efforts to make the European authorities aware of the highly unfortunate side effects of such regulation. It is now up to the EU to decide how the Basel Committee's proposals are to be implemented in Europe.
"A floor of 72.5% remains a very large pill to swallow for Danish credit institutions. Obviously, it is much better than the dreaded 80% floor, but it will cost billions nonetheless – a bill that may be passed on to customers to the potential detriment of Danish economic growth. The sector-wide efforts to prevent unnecessary, cost-intensive requirements from being imposed on well-capitalised Danish institutions with sound and creditworthy customers will continue in close liaison with the Danish parliament and the authorities," says Ulrik Nødgaard, Managing Director of Finance Denmark.
According to an assessment made today by a group of experts on Basel issues appointed by the Danish Ministry of Economic and Business Affairs, a 72.5% floor requirement will increase the capital requirements of Danish credit institutions by around DKK 72bn-83bn For more information, please refer to the website of the Danish Ministry of Economic and Business Affairs. (In Danish)
Today, credit institutions hold a lower amount of capital when offering lending to low-risk projects than to higher-risk projects. The problem with the output floor is that it creates a strong mismatch between risk exposures and the capital requirements, which is precisely why it does not have a stabilising effect. Quite the contrary.
"Like the Basel Committee, Finance Denmark is committed to securing financial stability and raising the comparability of capital ratios across countries and institutions. Therefore, the international efforts to improve the models applied today to determine capital requirements should be continued. Combined with the future leverage requirement, this could render output floors unnecessary," says Ulrik Nødgaard.
Finance Denmark also finds it a paradox that the Basel Committee would present a proposal that will have a highly severe impact on well-capitalised Danish credit institutions when the Committee was tasked with preparing proposals that do not raise general capital levels.
Learn more about Basel IV here.