Banks' Worst Fears Eased as Basel Soft-Pedals Capital Overhaul

  • Regulators pledge to stop short of raising capital levels
  • Leverage ratio stays at 3% except for world's largest banks

Global banking regulators pledged to refrain from further tightening capital requirements with new rules to be finalized in 2016, dispelling industry fears that triggered intense lobbying efforts over the past year.

The Basel Committee on Banking Supervision doesn’t plan to raise capital requirements across the board in the remaining projects of its post-crisis bank rule overhaul, it said Jan. 11 after a meeting of its oversight body, chaired by European Central Bank President Mario Draghi. The group, which includes the Bank of England and U.S. Federal Reserve, said it will assess the potential costs of any additional action.

“The committee will conduct a quantitative impact assessment during the year,” the group said in a statement. “As a result of this assessment, the committee will focus on not significantly increasing overall capital requirements.”

Basel’s slate of rules for this year, including a review of trading risks that the committee endorsed on Jan. 10, have faced heavy criticism from bankers, who say onerous new capital charges would crimp their ability to lend. The overhaul of how banks value risky assets has led industry executives to warn a regulatory onslaught -- sometimes referred to as Basel IV -- is still ahead, even after the last decade of new rules designed to prevent another market meltdown.

‘Basel IV’

Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. said the Basel’s latest statement is a response to bankers’ warnings.

“Global regulators clearly hope to tamp down continuing talk of a ‘Basel IV’ rule, emphasizing in both action and statements that continuing changes are recalibrations, not hikes,” Petrou said in an e-mail.

Draghi said the agreements reached by the Basel committee and the upcoming agenda seek to provide greater clarity about the capital framework and, “a clear path for completing post-crisis reforms.”

As part of this process, the regulator will hold a public consultation on removing internal-model approaches for some risks, such as the Advanced Measurement Approach for operational risk, as well as on “setting additional constraints on the use of internal model approaches for credit risk, in particular through the use of floors.”

The committee also sounded a soft note on another lingering worry of bankers, the unweighted leverage ratio. It will keep the minimum amount of capital per total assets unchanged at 3 percent, when it becomes a binding requirement in 2018, it said. For the world’s biggest banks, there may be an add-on, it said, without elaborating.

‘Revised Boundary’

The regulator approved new market-risk rules, known as the “Fundamental review of the trading book,” that take effect in 2019. Improvements include a “revised boundary between the banking and trading books that will reduce scope for arbitrage,” and a “revised internal models approach with more coherent and comprehensive risk capture,” the committee said.

The new rules, set for publication in the next few days, will also feature “an enhanced model-approval process and more prudent recognition of hedging and portfolio diversification,” as well as “a revised standardized approach that serves as a credible fall-back and floor to the model-based approach, and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions,” Basel said.

Stefan Ingves, chairman of the Basel Committee, said “finalizing the new market-risk framework represents an important milestone toward completing the Basel III reforms. The committee expects to publish further details of proposed revisions to the risk-weighted assets framework following its March meeting.”

Before it's here, it's on the Bloomberg Terminal.