An Analysis of the Capital Requirements Regulation (CRR) in Nordic Banks : Impacts of the Output Floor and Off-Balance Sheet Exposures on Bank Capital Adequacy
Niinimaa, Sampo (2023)
Niinimaa, Sampo
2023
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https://urn.fi/URN:NBN:fi-fe20231228157501
https://urn.fi/URN:NBN:fi-fe20231228157501
Tiivistelmä
The financial crisis of the early 2000s has led to tightening regulation by banks. Banks are considered such important institutions in terms of the national economy that bank failures such as the financial crisis can no longer occur today. That is why the Basel Committee on Banking Supervision has drawn up a legal framework for banks' activities, which has been implemented into EU law as a solvency ratio and as a Capital Requirements Directive. Tightened legislation has forced banks to raise the amount of their own capital and in the future the amount and quality of their own capital will still tighten and become more relevant. This is evident, among other things, by the fact that banks' own mechanisms for assessing credit relationship risks will be made more risk-sensitive, which means that the risk class of, for example, non-rated companies will increase. This will have a really significant impact on Nordic companies, as it is typical in the Nordic countries that banks themselves have issued credit ratings to companies using their own internal methods. Thus, when banks' own internal methods are restricted and companies are considered "not rated" at a time when banks' capital adequacy ratios are rising, research shows that this will have a radical effect on the price of certain loans. Banks may also need to change their own operating methods in the future so that their business does not suffer from future extortion. The new Basel IV, which will be implemented in the EU by the CRR, will enter into force gradually from 1 January 2025. There are still many question marks in the future regulation, some of which focus on off-balance sheet items and the related definition of commitment. This definition is new and, once certain conditions are met, such commitments would not be considered as commitments, so that the capital requirement would also not be actualised. This paper presents results from all Nordic banks without distinction. The impact of capital requirements is very different in different countries, depending on what methods banks use in those countries and what kind of credit portfolio banks have.