Apr 13, 2017 01:30 PM EDT
European banks may have to plug a capital shortfall of 120 billion euros ($128 billion) if new regulations drawn up by regulators including the Basel Committee on Banking Supervision come into force as they stand, according to McKinsey & Co.
The committee is putting the final touches to the Basel III post-crisis capital rules, setting stricter standards for how lenders estimate the riskiness of their assets. The global banking industry has dubbed this Basel IV, arguing that it constitutes a new, separate round of regulation. European resistance to aspects of the rules has stymiedefforts to meet an end-2016 deadline to complete the process, which has now stalled.
"This is a game changer for the European banking industry," McKinsey said in the report. "Banks will need to raise more capital, and will likely have to take some unconventional measures to comply" with the new regulations, it said.
The new standards from Basel, as well as a new accounting framework that will govern how banks provision for bad loans, will reduce European lenders' common equity Tier 1 ratio, a key measure of financial strength, by 3.9 percentage points to 9.5 percent in aggregate, the report said, based on figures as of mid-2016. This would leave banks short of the estimated 10.4 percent ratio regulators require, it said. Under the same assumptions, capital ratios of their U.S. counterparts would fall by 1.3 percentage points.
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