Photographer: Ronald Patrick/Bloomberg

Bank Regulators Seek ‘Miracle’ Deal on Capital Before Trump

Updated on
  • Basel Committee members meet in Santiago, Chile Nov. 28-29
  • U.S., EU, Japan seek to bridge divide on capital-model rules

Global banking regulators are scrambling to reach a compromise on new capital standards, as political support wanes in Europe and the U.S. for new curbs on the industry.

The Basel Committee on Banking Supervision is huddling at a private meeting in Santiago, Chile, on Monday and Tuesday to try to bridge deep divides between the U.S., Europe and other nations on a package of rules billed as the final international regulatory response to the 2008 financial crisis. The Basel Committee, which includes the U.S. Federal Reserve and the European Central Bank, is racing to meet a year-end deadline for completing the standards.

The U.S. has pushed for strict rules to protect against future market meltdowns, whereas Europe and Japan have warned the Basel Committee’s proposals could hit banks with billions in costs. The election of Donald Trump, who has vowed to roll back financial regulations, created uncertainty before the meeting about possible changes of the U.S. position and its commitment to the international framework.

“Everyone is dead scared that the new incoming President Trump will try to revise all financial and banking regulation and that he and the new incoming administration will not actually agree to the Basel rules,” said Charles Goodhart, director of the financial regulation research program at the London School of Economics and a former Bank of England policy maker. “I just don’t see how a U.S. representative can enter into any kind of quasi-binding commitment under the present circumstances.”

Asset Risk

At issue are curbs on banks’ ability to use their own complex models to estimate asset risk for setting capital requirements. The U.S. has long been skeptical of such models, while Europe and Japan insist they provide more accurate assessments in many cases. The Basel Committee is trying to prevent banks gaming the rules while living up to a pledge that capital requirements won’t increase significantly as a result of the revised rules.

“If the committee achieves all these things to everyone’s satisfaction, it will be a miracle,” Wayne Byres, chairman of the Australian Prudential Regulation Authority, said earlier this month. “Behind the scenes there is still much horse trading to do.”

The most strident calls for revisions to the Basel Committee proposals have come from Europe.

“Missing the end-year deadline for an agreement would damage the credibility of the standard-setting process,” John Berrigan, the European Commission’s deputy director general for financial services, said on Nov. 25. “On the other hand, we take the position that a quick deal isn’t necessarily a good deal. We won’t necessarily accept timing over quality.”

Public Ultimatum

Germany added to the drama surrounding the talks, warning earlier this month that it’s prepared to walk away from the negotiating table unless it wins major concessions. The rare public ultimatum delivered by Andreas Dombret, a member of the Bundesbank Executive Board, capped months of increasingly strident opposition in Europe to the Basel Committee’s proposals.

The German position is shared by France, Dombret said in an opinion piece published in French business daily Les Echos on Monday. That’s not always the case when it comes to European banking rules, about which the two nations have frequently been at odds.

“A coordinated and concerted approach by the French and German financial supervisors proves to be a valuable support in the negotiations at the Basel Committee,” Dombret said. “The positions of the Banque de France and the Bundesbank are closely aligned.”

Internal Models

European regulators and politicians have called for the Basel Committee to scrap key elements of the rules, including an “output floor” that limits the extent to which banks can lower their capital requirements by using internal models compared with formulas set by regulators. The U.S. has supported floors to guard against banks gaming regulations.

If the Basel Committee members can’t resolve their disagreements in Santiago, outstanding issues would probably be kicked up to the regulator’s oversight body, led by ECB President Mario Draghi, according to two people familiar with the deliberations. The goal would still be to complete the overhaul on schedule at the January meeting of the oversight group, the people said, declining to be identified because the talks are private.

“We should have something which works for Europe, which works for European banks,” Frederic Oudea, chief executive officer of Societe Generale SA, said last week. “Definitely there is a need to change what was initially proposed. And we’re saying that it’s better to have no agreement than a bad agreement.”