U.S. Softens Basel Stance in Push for Deal on Capital Rules

Updated on
  • Fed said to be ready to compromise on so-called output floor
  • BaFin’s Roeseler says June Basel meeting is too soon for deal

The U.S. has softened its position in talks on global bank-capital rules, easing a months-long deadlock with the European Union and boosting the chances of a deal.

The Federal Reserve, which leads the U.S. delegation in the Basel Committee on Banking Supervision, is ready to compromise on the level of a disputed output floor, according to two people with knowledge of the talks. The floor is a blunt check on firms’ use of their own statistical models to measure asset risk, part of the process for determining their capital requirements.

A wide gap still remains between the U.S., which has long been skeptical of banks’ internal models, and Europe, which insists the models provide more accurate assessments in many cases. On Tuesday, Raimund Roeseler, an executive director at BaFin, Germany’s banking supervisor, told reporters that a deal at the Basel Committee’s next scheduled meeting in mid-June is unlikely because “we’re still too far apart.”

“The status has improved from not talking at all to talking,” BaFin President Felix Hufeld said at the same press conference in Frankfurt. “That’s not the same thing as a solution.”

The U.S. and Europe have been at loggerheads since late last year over the output floor. In the intervening months, EU regulators said the talks were on hold while President Donald Trump installed new faces at the four U.S. institutions in the Basel Committee.

EU Objections

The Basel Committee floated a compromise in December under which banks’ measurements of asset risk using internal models can’t drop below 75 percent of the result yielded by standard formulas set by regulators. Efforts to complete an agreement collapsed later that month, as the EU dug in its heels to oppose rules it said would penalize the bloc’s banks and stifle lending.

In the aftermath, the U.S. and EU backed away from the 75 percent figure, but U.S. negotiators are once again prepared to continue talks at this level, as other countries have also signaled their support, one of the people said, declining to be identified because the talks are private.

The Basel Committee is trying to rein in abuse of the models while living up to a pledge that overall capital requirements won’t increase significantly as a result of the revised rules.

A Fed spokesman declined to comment on the negotiations.

Debbie Toennies, global head of regulatory affairs for the corporate and investment bank at JPMorgan Chase & Co., said a floor could make sense if it’s properly calibrated.

“As long as it’s not driving banks’ decision-making regarding lending, and it’s a catch-all, it should not be a problem in the market, and it should to a certain extent allow for some level-setting across the globe of a minimum amount of capital,” she said at a conference in Lisbon on Tuesday.

Eric Litvack, chairman of the International Swaps and Derivatives Association, said that a 75 percent output floor “would probably start to be a binding constraint for a number of firms worldwide, not just in Europe.”

“Supervisors have been encouraging banks to develop risk-based models in order to allocate capital appropriately according to the risk of their assets,” he said. “If you make the output floor a binding constraint, you’re effectively making decisions about how capital is allocated and how we finance the economy. And I’m not sure that’s the appropriate way to go.”

— With assistance by Alexander Weber, Esteban Duarte, Alessandra Migliaccio, and Frances Schwartzkopff

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