U.S. Regulators Hang Tough at Basel as Trump Rollback Looms

  • Negotiators said to have no fresh compromise deal on the table
  • U.S. will push hard for consensus on output floor, Petrou says

U.S. bank regulators are taking a hard line in a showdown with the European Union over global capital rules, even as President Donald Trump begins to pull the country out of international agreements and prepares to roll back financial regulations.

Talks in the Basel Committee on Banking Supervision have bogged down, with no fresh compromise on the table to reconcile U.S. and EU differences on how to stop banks using their own complex models to game capital rules, according to four people familiar with the matter. The U.S. insists on tough curbs, while the EU, whose major banks would take the biggest hit under the new rules, is pushing a softer line.

Trump has vowed to roll back financial regulation, and since taking office he has begun to pull the U.S. out of international agreements such as the Trans-Pacific Partnership trade deal. Trump hasn’t yet turned his attention to the Basel Committee, but there is concern that U.S. commitment to global banking standards may dwindle on his watch.

While U.S. bank regulators are independent agencies, they “traditionally do suspend controversial actions until the new administration is organized and they can decide which fights, if any, to pick,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington.

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

“That said, advocacy within Basel for the U.S. position” on the overhaul of Basel III “is not limited in any way, and I would expect the U.S. agencies to continue to push hard for consensus that would then strengthen their hand back home,” she said.

The Basel Committee has already missed a deadline to deliver the new rules, and is now targeting a deal in the “near future.” Once an agreement is reached, the regulator’s oversight body, whose next meeting could come in mid-March, must approve the final standards. The Basel Committee meets next on March 1-2.

“To prudently plan for long-term growth, we need to have more stability and clarity on the regulatory framework under which we operate,” UBS Group AG Chief Executive Officer Sergio Ermotti said on a call with analysts on Friday. “Nevertheless we welcome the decision to postpone” a decision at Basel “and the recognition by some stakeholders that the risk of unintended consequences outweighs the benefit of a quick resolution.”

The current stalemate does not indicate a wavering U.S. commitment to the negotiations, one of the people said.

U.S. Priorities

“We’re counting on the new U.S. administration to explain their priorities so that we can make progress,” Valdis Dombrovskis, the EU’s financial-services chief, told reporters in Brussels on Friday. “At this stage we do not have any concrete indications” from the U.S., he said.

The U.S. members of the Basel Committee are the Federal Reserve, the New York Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Nine EU countries are members, and the bloc as a whole is represented by the European Central Bank. Other regulators on the list include the China Banking Regulatory Commission and Japan’s Financial Services Agency.

A Fed spokesman declined to comment on the talks.

At issue in the Basel Committee talks is a so-called output floor, a blunt check on how much lower banks’ estimates of risk can be compared with those produced by standard formulas set by regulators. Under a compromise proposal floated in early December, modeled results can’t drop below 75 percent of the result yielded by the standardized approach. The floor would phase in from 55 percent in 2021 to the full 75 percent in 2025.

‘Complexity and Opacity’

Stefan Ingves, the Basel Committee’s chairman, concluded after a meeting in Santiago, Chile, in late November that there was “broad support for an aggregate output floor in the range of 70 percent to 75 percent,” according to the draft compromise seen by Bloomberg.

The talks are now “largely about the design and calibration of an output floor,” Felix Hufeld, the head of BaFin, the German bank regulator and Basel member, said on Jan. 26. While the standard should be global, it should also “take account of very different national market structures,” he said.

The U.S. is wary of letting banks use internal models because they’re vulnerable to abuse. Daniel Tarullo, a Fed governor, said in 2014 that the “combined complexity and opacity of risk weights generated by each banking organization for purposes of its regulatory capital requirement create manifold risks of gaming, mistake, and monitoring difficulty.”

The Europeans, by contrast, have called for the output floor to be scrapped altogether. That makes it difficult to find middle ground.

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 Morgan Stanley analysts.

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