Strict approach to Basel 4 implementation limits capacity for economic recovery

The strict application of the Basel 4 capital requirements, as proposed by the Dutch Ministry of Finance and Dutch Central Bank (DNB) earlier this week, would limit the capacity for economic recovery. Banks would be required to increase their buffers further while simultaneously meeting the societal expectation to finance the restarting of business activity in the Netherlands. This approach strongly contrasts with the supervisors’ reaction to the COVID-crisis, which gave flexibility to continue providing ample credit to companies affected by the lockdowns. The Dutch Ministry of Finance and the Dutch Central Bank (DNB) have repeatedly stated that Dutch banks are well capitalised. Now that we are at the start of the economic recovery and entering a period that will require significant investments, this policy position is not very helpful. Furthermore, it hampers the necessary financing of the sustainable and digital transformation to which banks would like to contribute. From this perspective, a more proportionate implementation of Basel 4 would be desirable.

Nederlands

The Dutch position on the Basel implementation is based on a global accord that does not consider the specific European or Dutch economic context. The European economy relies less on government facilities to, for example, offload mortgages (such as Freddie Mac and Fannie Mae in the US). Therefore, European consumers and businesses will be affected more by Basel 4. The Dutch Ministry of Finance and the Dutch Central Bank (DNB) should consider the consequences for the Dutch economy. Countries such as France, Germany, Denmark, Luxemburg, which would also experience a significant impact, opt for a more proportionate implementation. According to the European Banking Authority, the increase of capital for Dutch banks would be over 20% (pre-COVID). In the future, this would lead to higher financing costs for entrepreneurs, households and even semi-governmental institutions. Some sectors will be more affected than others. Farmers will be confronted with significantly higher financing costs since they finance their activities using farmland as collateral. Like most other Dutch companies, hospitals do not have an external credit rating and will likely see their financing costs increase as well.