The Impact of Basel IV on Danish Banks

Caroline Bengtsson

Student thesis: Master thesis

Abstract

The aim of this thesis was to analyse the impact of the output floor from Basel IV on Danish Banks and the Danish economy. The output floor has been criticised for removing the link between risk and capital requirements especially for Danish banks whose risk weights under the internal models are very low. Furthermore, critics evaluate that the output floor will make riskier loans more attractive for banks. In this thesis the risk weighted assets has been calculated under the output floor as proposed in Basel IV for the four biggest Danish banks: Danske Bank, Jyske Bank, Nykredit and Sydbank. Furthermore, secondary data has been collected and three interviews conducted with representative from the Danish Banks. The results from the analysis showed that all of the four banks risk weighted assets will increase significantly by the implementation of the output floor for credit risk. It showed that the impact on each bank were very individual and the increase in total risk weighted assets varied between 16 pct. to 45 pct. The analysis showed that Jyske Bank and Nykredit mostly will be affected by the output floor for credit risk while Sydbank and Danske Bank will be the less affected. The analysis also indicated that none of the banks will have difficulties meeting the capital requirements when the output floor is implemented. All four banks have more than adequate equity to fulfil the requirements why it is found that the banks should increase the pay-out in the coming years either by dividend or share buyback programs. The output floor will have a negative impact on returns since equity financing is pricier then debt financing. This will either cause a negative effect on investments and growth in the banks or price increases. The Banks did not want to comment on how the output floor will affect prices, but their interest organisation Finance Denmark believes it will lead to price increases and thereby slow down economic growth. In some of the banks they believe that it will be possible to overcome the significant impact of the output floor by either lowering some of the capital requirements that are set by the Danish authorities, or by expanding the business to selling portfolios of corporate bonds and thereby elude the high risk weights for unrated corporate exposures. In spite of the possible ways to overcome the consequences of the output floor it is concluded that the output floor is inappropriate. The traditional banks are under great competition from alternative digital banks and currencies why the conservative output floor might be a reason for the consumers to turn to the alternative financial institutions that are not subjected to the same capital requirements and supervision. The output floor could thereby lead to the EU Commission in some degree will lose its control over financial stability in EU which is not the intention.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2018
Number of pages85