Volatility Spurs Regulators to Give Banks Leeway on Asset Values
Volatility Spurs Regulators to Give Banks Leeway on Asset Values
(Bloomberg) -- European regulators plan to ease rules for valuing complex bonds, derivatives and other assets in the second big move this month to help the financial industry weather the coronavirus.
The European Banking Authority said the surge in market volatility this year has made it much harder for banks to gauge the value of their assets. In a proposal this week, the regulator, which sets banking standards across the European Union, said it intends to soften the blow of the valuation rule through the end of the year to avoid hitting bank balance sheets.
If the change is approved, banks could avoid hundreds of millions of euros in extra capital demands, according to Rob Smith, banking partner at KPMG UK. That would be a big relief to European banks already bracing for a surge in bad loans in the coming months.
“It’s not on the immediate radar for many people given all the focus on credit risk and getting cash out to customers,” Smith said in a phone interview. “But it’s the sort of thing that would have a material impact.”
European regulators have raced since the coronavirus outbreak to give relief to the financial industry, reducing capital buffers and easing trading regulations to encourage lending to other businesses struggling through the crisis. The European Central Bank earlier this month granted temporary relief on a separate capital rule that would help banks like Deutsche Bank AG and BNP Paribas SA with big trading desks.
The latest plan affects the “prudent valuations” banks are obliged to make for their assets -- an estimate that the firm is 90% confident it could achieve if it sold out. These figures are often different and lower than the fair values banks list in their financial statements. Adjusting for this gap sometimes requires firms to take a hit to their common equity Tier 1 capital.
The EBA said on April 22 that the extreme market volatility this year has made these adjustments more likely and that policy makers did not intend for the “excessive impact” that would result. Banks will be allowed to smooth out more price spikes than usual when working out their valuations until the end of the year.
The EBA’s proposal requires the European Commission in Brussels to sign off before it’s official. A Commission official said it aims to take action as soon as possible.
The Association for Financial Markets in Europe, one of the banking industry’s biggest lobby groups, said the proposed change would help banks respond to the crisis.
“The guidance combines important adjustments to address the undue procyclical impacts of Covid-19 in the area of prudent valuation adjustments,” said Michael Lever, AFME’s head of prudential regulation.
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