Germany Threatens to Abandon Basel Talks If Demands Not Met

Updated on
  • Dombret says Bundesbank won’t accept capital deal at any price
  • Basel Committee members are racing to meet year-end deadline

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Germany’s Bundesbank delivered an ultimatum to other major banking powers including the U.S. that it will walk away from talks on revamping global capital rules unless its key demands are met.

Andreas Dombret, a member of the Bundesbank Executive Board, said on Tuesday that Germany won’t accept a deal “at any price.” He laid out a series of demands, including two “essential areas of action” for talks later this month in the Basel Committee on Banking Supervision, the international standard-setter. Both will probably be met with skepticism in Washington.

With the administration of President-elect Donald Trump soon to take power in the U.S., propelled into office in part by increasing suspicion of globalization and regulation, Dombret said he hopes work in the Basel Committee “will continue to be based on mutual trust.” But the Bundesbank “is not prepared to reach an agreement at any price,” he said in a speech in Frankfurt.

Basel Committee members, which include the U.S. Federal Reserve and Japan’s Financial Services Agency as well as the Bundesbank, are racing to meet a year-end deadline to put the final touches on the international capital standards known as Basel III. Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., another committee member, said the U.S. shouldn’t budge from stronger standards under European pressure.

‘Stronger Standards’

“Any country can walk away from stronger standards,” Hoenig said in an e-mail. “But having experienced the financial crisis, it’s unclear to me what this lowering of standards would achieve for financial stability and long-term economic growth. The U.S. should not compromise the strength of our system."

While a number of European Union regulators and politicians have made clear that sweeping changes must be made to the Basel Committee’s proposals before they’ll sign on to an agreement, Dombret’s statement that Germany is prepared to walk away from the table was particularly emphatic.

EU opposition to parts of the Basel Committee’s proposals has already turned the talks into a hard slog. European politicians and policy makers insist not only that the new rules don’t significantly increase overall capital requirements, but also that the bloc’s banks aren’t unduly punished.

The U.S., by contrast, has consistently advocated tough rules. Hoenig, a political independent, warned against backsliding as recently as last week.

Internal Models

The Basel Committee convenes Nov. 28-29 in Santiago, Chile, to continue the negotiations. Felix Hufeld, president of German supervisor BaFin, said last week that he couldn’t rule out a situation in which “no compromise is better than a bad compromise.”

Dombret said one “essential” point for Germany is the preservation of the risk-sensitive framework, in particular allowing banks to use their own internal models to measure credit risk for determining capital requirements.

Europe and Japan support the internal-model approach, while the U.S. has said regulators should consider discarding it because it creates the potential for banks to game the rules.

A second priority for Germany is to prevent the introduction of a so-called output floor in the final Basel package, Dombret said. This floor would cap the benefit banks can gain by measuring asset risk using their own statistical models instead of the standardized formula set by regulators.

“In theory, it acts as a way of putting a stop to the frivolous calculation exercises associated with using internal models,” he said. “In practice, however, it works against the focus on risk. This is something we’re not prepared to accept. We have no interest in banks taking on additional unwanted risks. Basel III has developed other instruments, such as the leverage ratio, to fight against risks of modelling and misuse.”

The FDIC’s Hoenig said last week that the “mere fact that risk-based approaches must always be constrained and negotiated by regulators -- through the complex processes of flooring inputs and outputs, for example -- only underscores the necessity of a simple, robust, and uncompromised leverage ratio.”

— With assistance by Yalman Onaran, and Nicholas Comfort

(Updates with comment from FDIC’s Hoenig in fifth paragraph.)
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