Page 68 - The Economist20171214

68 Finance and economics The Economist December 16th 2017
Bank capital banks need less equity for a given CET1ra-
China’s economists tio. To limit the potential advantage from
Profits forecast Arriving hopefully using models, Basel’s standard-setters pro-
posed settinga floorforthe minimum ratio
ofRWAs calculated from models to the an-
SHANGHAI swerfrom the standardised approach.
Economists become hotcommodities
Because European banks tend to hold a
VERGRANDE, a Chinese property lot of assets with low risk-weights, such as
Efirm, is a bigspender. It was until The revised standards are complete at mortgages and corporate loans, they want-
last. Have Europe’s banks gotofflightly?
recently the country’s most indebted ed a low floor or none. Because American
developer. It also owns a football club OWEVER long a storm lasts, clearing banks have fewer such loans and their do-
with one ofthe highest payrolls in Chi- Hup takes longer. On December7th Ma- mestic rules already contain a floor, they
na. It has extended its largesse to a new rio Draghi, president of the European Cen- wanted a higherone, arguingthatthe Euro-
field: economics. Havingfounded an tral Bank and head of the committee that peans’ habits were unfair and unsafe. Ba-
economic-research institute, Evergrande approves global bank-capital standards, sel’s drafters first suggested a floor of be-
last month poached Ren Zeping, a star declared that revisions to Basel 3, the ver- tween 60% and 90% of the amount under
analyst with a bigbrokerage, to serve as sion drawn up after the financial crisis of the standardised model. After much hag-
its first chiefeconomist. His annual 2007-08, were complete. The overhaul of gling—with the French the most stubborn
salary of15m yuan ($2.3m) is, based on the previous rules, which were blown holdouts—the floorwas set at 72.5%.
available information, the highest ever awayin the tempest, began eightyears ago. The fine details make life a little easier
foran economist in China. Not bad for a The revised set, informally called Basel 4, for banks. Residential mortgages, “special-
country where forecastingthe official will not take full effect until 2027. ised” lending, such as infrastructure loans,
growth figures accurately has foryears That lengthy period of adjustment is and some corporate loans will incur lower
required little more research than read- one way in which Basel 4 is less demand- risk-weights in the standardised approach
ingthe official growth targets. ing than banks, notably in Europe, had than first suggested. Basel 4 does forbid us-
Yet Evergrande is not alone in splash- feared. Several other tweaks mean that the ing fancier models for loans to large com-
ingcash in China, whetherin property, standards banks must eventually meet panies. But banks had worried that their
football or, lately, economics. Competi- will be less exacting than first proposed. use forsmallerfirms would be curbed too.
tion forthe best—or, rather, best-known— Already forced to bolster their balance- Basel 4 also revises the capital require-
economists is fierce. The past half year sheets with lots more equity—ofwhich the ment to cover operational risk—such as
alone has resembled a frenzied transfer crisis showed them to be woefully short— fines for bad behaviour or the cost of com-
window fortheirservices. Besides Mr banks may deny that they have got off puter hacks. Banks must use a standar-
Ren, halfa dozen otherseniorecono- lightly. But they probably have. dised method, outlawing an alternative
mists have jumped ship, mostly be- Basel 4 was supposed to be settled a that gave them some discretion. This too
tween brokerages. year ago. It wasn’t, because of a row over looks less stringent than it might have
Salaries foreconomists are rarely proposed limits on banks’ use of internal been. In principle, the operational-risk re-
disclosed, but, judgingfrom the few that models to calculate their risk-weighted as- quirement may be multiplied to reflect
have been reported, it is fairto assume sets (RWAs), which may also be worked past transgressions (because banks with a
that they are not strugglingto make ends out from a “standardised” approach. The bad record may sin again). National super-
meet. Li Xunlei had been earning9.9m ratio of common equity to RWAs, known visors, however, maychoose notto bother.
yuan a yearat HaitongSecurities before as the CET1 ratio, is a key indicator of Standard-setters also postponed by two
movingto a rival late last year. Chief banks’ capital strength. Low risk-weights years, until 2022, the implementation of
economists at China’s top brokerages mean lower RWAs, which in turn mean stricter coverage of trading losses. Several
tend to have salaries in the 6m-8m yuan countries had already announced delays.
range and pay is climbingevery year, Analysts at UBS estimate that Basel 4
accordingto a blogon the website of Cai- leaves European banks with a capital
jing, a respected financial magazine. shortfall of €40bn ($47bn), but this dwin-
The most basic ofeconomics explains dles to €5bn ifsupervisors make offsetting
why. China has a supply ofjust a hun- changes—Nordic countries may unwind
dred orso economists with longrecords increases in requirements made ahead of
ofcrunchingnumbers, interpreting Basel 4. The impact will vary hugely across
policy, cultivatingcontacts and speaking banks. And banks point out that Basel 4 is
to investors. And with brokerages and not their only burden. On December 12th
asset managers investingheavily in their UniCredit, Italy’s biggest bank, estimated
staffas they professionalise, demand for that Basel 4, new guidelines from the Euro-
theirservices is strong. pean Banking Authority, a supervisor, and
Asupply response will, in time, slow other rule changes would lop 4.7 percent-
the salary gains. Aflood oftalented age points, or one-third, from its CET1 ratio
graduates in the dismal science means between 2017 and 2027. (It expects to earn
that wages ofjunioranalysts are much more than enough to offset this.)
more subdued. But theirprospects Banks also say they have plenty of equ-
should still be bright— ifthey can master ity, should disaster strike again. They may
the art ofthe aphorism. One ofMrRen’s be right. But if interest rates stay ultra-low,
recent quips was about China’s slowing central banks will have little scope to cut
growth as the economy matures: “the them afteranothercrash. The financial sys-
new 5% will be betterthan the old 8%”. tem will therefore be more reliant on
Forhim and his rarefied peers, that is banks’ shock-absorbers. So yes, cheer the
most certainly true. completion of Basel 4, but hope that those
are thickenough—ornot put to the test. 7