National regulators able to ‘opt out’ of Basel II maturity treatment

The Basel Committee on Banking Supervision, the architect of Basel II, has climbed down from its initial plans to force banks to include a full maturity adjustment on capital allocated against risk of defaulting loans, in its proposed mark-to-market advanced internal ratings based (IRB) rules.

The move – made in response to fierce German opposition to initial proposals – means national regulators can opt out of forcing banks to use a full maturity adjustment in marking-to-market loans to domestic firms. But this only counts for firms with consolidated sales and consolidated assets of less than €500 million.

Many studies have shown that banks should hold more capital against longer-term loans. “The data analysed by the committee clearly shows that you have these upward-sloping curves for maturities,” a Basel committee member told Risk in December. But Germany argued that such treatment would have an adverse impact on lending to its small to medium-sized enterprises – considered the growth engine of the German economy.

Now, if a national regulator such as the Deutsche Bundesbank, decided to opt out from enforcing maturity treatment of loans, as seems likely, all loans will have an assumed maturity of 2.5 years – the same as under Basel II’s foundation IRB treatment.

The move is a coup for German domestic banks, which have an average maturity of 4.28 years, according to the Basel Committee’s second quantitative impact study (QIS2). The QIS2 study found internationally active German banks granted loans with an average maturity of 2.95 years, while their US counterparts held loans with an average maturity of two years.

But the Basel Committee said any exemption would have to take place at a national level, rather than on a bank-by-bank basis. This could have a negative impact on Germany’s biggest bank, Deutsche Bank, which is said to have a low average maturity of loans in its lending book.