BNP Paribas to benefit from change to eurozone exposure rules

Global regulators are changing how they treat the pan-eurozone exposure of lenders based in the bloc in a move which should allow France’s BNP Paribas to cut its capital requirements and make cross-border mergers easier in the region.

The shift, which was announced by the Bank for International Settlements on Tuesday, is a step towards harmonising regulations for the eurozone banking sector, which policymakers and politicians have been pushing for since the region’s debt crisis a decade ago.

The biggest banks based in the 19 countries that share the euro will have their cross-border exposures within the bloc treated more like domestic ones under the change, which could reduce the amount of extra capital they need to cover their systemic importance.

The different treatment of capital requirements across member states has long been seen as a hurdle to cross-border mergers between eurozone banks, along with the lack of a common European safety net for depositors and delays in creating a single market for the sector.

Europe’s fragmented banking sector has fallen behind North American competitors since the financial crisis in terms of market share and profitability. Large domestic players such as UniCredit in Italy and Société Générale in France are widely considered most likely to participate in cross-border dealmaking once regulations are harmonised.

The new rules agreed by the BIS will affect the calculation of extra capital buffers for the eight eurozone-based lenders included in the list of 30 globally systemically important banks that are considered most likely to trigger a financial crisis if they were to go under.

Two-thirds of their pan-eurozone exposures will be treated as domestic, instead of foreign and therefore more risky. The BIS decided not to treat these exposures as entirely domestic because the eurozone banking union remains incomplete; there is no common deposit insurance scheme, for example.

Jacqueline Mills, head of advocacy at the Association for Financial Markets in Europe, described the shift as “a step in the right direction” that would “help remove one of the regulatory disincentives to developing pan-European activities”.

Regulators group the world’s banks into five buckets based on a number of factors, including size, complexity, cross-border activity, interconnectedness, sustainability and financial institution infrastructure.

Each bucket has steadily increasing capital requirements, from an extra 1 per cent of assets adjusted for risk for banks in the lowest bucket to a 3.5 per cent capital add-on for those in the highest bucket.

BNP Paribas has an extra 2 per cent capital buffer through being grouped in the third bucket along with Citigroup and HSBC. The new rules mean the French group is likely to drop into the fourth bucket, reducing its extra capital buffer requirement to 1.5 per cent. BNP, which is one of the biggest lenders to eurozone households and businesses with €2.6tn of total assets, declined to comment.

Deutsche Bank is already in the fourth bucket, but its pan-eurozone exposures are smaller than BNP’s so it is less likely to benefit immediately from the change. There are six eurozone banks in the sixth bucket. But the BIS said no banks will be allowed to drop out of the ranking entirely because of the changes.

The European Central Bank, which is a member of the BIS and has been pushing for closer harmonisation of eurozone banking regulation, welcomed the change as “another step toward a more integrated banking sector in Europe and the creation of a truly domestic market”. 

The ECB is due to publish the detailed methodology behind the changes in the coming weeks. It will then be up to each bank’s domestic supervisors to decide whether to apply the changes to their capital buffers. The BIS said the change would not affect the scores of any non-eurozone banks.