Global Bank Capital-Rule Revamp Postponed as Europe Digs In

  • Basel oversight body pushes back January meeting on standards
  • Work is expected to finish in ‘near future,’ regulator says

Global bank regulators pushed back a final decision on new capital standards as they struggle to reach an agreement in the face of strident European opposition.

The oversight board of the Basel Committee on Banking Supervision said on Tuesday that it had postponed a meeting scheduled for Jan. 8 to allow for more debate on standards meant to prevent banks from gaming capital rules. Top European Union policy makers have campaigned against a major element of the reform package, a so-called capital floor, arguing that it would unfairly punish the bloc’s banks and harm its economy.

Work on the post-crisis capital framework known as Basel III should conclude in the “near future,” the oversight body said in a statement. Remaining issues should be resolved in the first quarter, according to a person with knowledge of the discussions. The delay could open the door to more lobbying from the financial industry and EU officials to soften the restrictions.

“Completing Basel III is an important step toward restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal," said European Central Bank President Mario Draghi, who heads the Basel Committee’s oversight body. 

The Basel Committee, which brings together regulators including the ECB, the U.S. Federal Reserve and Japan’s Financial Services Agency, holds its next scheduled meeting March 1-2. Once it reaches consensus on completing Basel III, the oversight body, whose next meeting could come in mid-March, must approve the final standards.

The capital floor has emerged as the main flash-point in several years of talks on rules intended to clamp down on banks’ use of their own complex models to assess the risk posed by mortgages, corporate loans and other assets. While big banks rely on the models to determine how much capital they need to fund their businesses, regulators have grown increasingly skeptical of the accuracy of the estimates since the financial crisis.

What Global Bank Regulators Are Fighting About: QuickTake Q&A

French, German, Dutch and Nordic banks could be hit the hardest by the floor because they have traditionally modeled minimal risks stemming from mortgages and corporate exposures, according to research from analysts at Morgan Stanley.

U.S. regulators have supported curbs on the models, while European and Asian authorities have been more likely to defend the industry estimates. Big banks including Deutsche Bank AG and Credit Agricole SA have lobbied against the Basel Committee’s proposals, arguing that they could add billions of dollars in extra capital requirements on the industry and hurt economic growth.

The Basel Committee sought the capital floor as a blunt check on how much lower the industry’s estimates of risk can be compared with those produced by standard formulas set by regulators. Under a proposed compromise under discussion at the Basel Committee in December, modeled results can’t drop below 75 percent of the result yielded by the standardized approach.

Why German Banks Took Stand Against Basel Capital Floors

The floor would phase in from 55 percent in 2021 to the full 75 percent in 2025, according to internal Basel Committee documents seen by Bloomberg.

“The risk is an output floor that is binding for many banks in our universe (perhaps reduced given the delay),” Deutsche Bank analysts Omar Keenan and Kinner Lakhani wrote in a note to clients on Tuesday.

“We show that a 60 percent floor would be the binding RWA constraint for a smaller number of banks,” they wrote. “But 75 percent would be the binding RWA constraint for most banks in our universe. Given press reports that the U.S. position was sticking to 75 percent as a minimum, then we can see how no agreement was reached.”

The compromise floated last month ran into strong EU opposition because it retained the floor. Andreas Dombret, a member of the Bundesbank Executive Board, has called for the floor to be removed entirely, echoing the position of Valdis Dombrovskis, the EU financial-services chief, who would lead European efforts to put the standards in place across the 28-nation bloc.

Risk Sensitivity

The European Commission, the EU’s executive arm, said on Tuesday that it would continue to seek an agreement that improves existing standards, while maintaining risk sensitivity in the regulatory framework and avoiding significant overall increases in capital requirements.

The delay probably pushes any Basel Committee meeting on the standards beyond the Jan. 20 inauguration of Donald Trump as U.S. president. Trump’s team has vowed to dismantle financial regulations, raising the prospect that whatever deal is struck at the international level could be shelved or watered down when national authorities take over the process of implementation.

The decision to postpone the finalization of package of proposals on the revision of the capital framework for banks “is to be welcomed,” said Michael Lever, head of prudential regulation at the Association for Financial Markets in Europe.
 
“AFME has consistently argued that adequate time is needed to create a framework capable of accurately measuring the risks assumed by banks, which can also accommodate structural differences between banking markets in different jurisdictions,” he said.

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