Basel IV implementation in Europe

When the new Basel agreement is integrated into the European Capital Requirements Regulation (CRR) in 2021, this will have a major impact on finance providers subject to these rules. The low risk of leasing portfolios is currently not recognised adequately, leading to substantially over-conservative capital requirements. Rectifying this situation is a primary focus for Leaseurope.

Businessman with basel 3 sign

The Basel III framework is a central element of the Basel Committee’s response to the global financial crisis. It aims to address a number of shortcomings in the pre-crisis regulatory framework and provides a foundation for a resilient banking system to avoid the build-up of systemic vulnerabilities. At the end of 2017, the Basel Committee released outstanding Basel III post-crisis regulatory reforms, the so called Basel IV agreement. These will be implemented in the European Union in the upcoming CRR3, currently being negotiated.

A prudential framework appropriate for leasing

Existing prudential regulations within the European Capital Requirements Regulation (CRR) do not reflect the real risks of leasing exposures and proposals in the new Basel IV standard, if implemented in Europe as such, would increase the regulatory capital required for leasing even further. Leasing should no longer be treated in the same manner as bank loans (whether secured on physical collateral or unsecured) as the risks are completely different. In order to recognise the low risk profile of leasing, we have developed a number of regulatory proposals that we have shared with the European Commission, the European Parliament and the EU Member States to be considered in their negotiations on the upcoming CRR3.

As an indication of the importance of this issue, the prudential treatment of leasing is also addressed in the positions of SME United, Business Europe and the European Banking Industry Committee (EBIC).

Gavel on stack of papers

Key concerns for lessors

  • Benchmarking IRB Approaches to the Standardised Approach through the new output floor artificially limits the benefit of internal modelling, particularly since lease collateral is not recognised in the Standardised Approach and thus capital requirements here are high
  • input floors setting limits on the minimum values allowed for probability of default (PD) and loss given default (LGD) unjustifiably penalise low risk forms of lending like leasing
  • higher overcollateralization requirements for secured LGDs under the IRB-Foundation approach are excessively conservative, particularly for leasing which is based on strong physical asset expertise
  • Inability to use the IRB-A Approach for banks and large corporates significantly raises capital requirements for these exposures

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