Global Deal on Basel Bank Capital Rules Is Seen Within Reach

  • Basel Committee regulations will include output floor on risk
  • Committee official warns of ‘dark side’ of long transitions

Global regulators expressed optimism that they’ll soon conclude a deal on revamping bank capital standards known as Basel III that have fueled a clash between Europe and the U.S. for more than year.

William Coen, secretary general of the Basel Committee on Banking Supervision, said in London on Thursday that negotiators are pushing forward on restrictions that will include a key curb to ensure that big banks don’t understate risks. That measure, a so-called output floor, sparked opposition from European Union and Japanese regulators, who said it would punish their banks. The U.S. has been the most outspoken defender of the floor.

“Discussions continue on the final piece of the jigsaw -- the calibration of the output floor -- and I am optimistic that this measure will also soon be agreed,” Coen said in a speech.

“There is momentum,” Coen said. “This is being discussed at the highest levels, where it needs to be discussed. The technical work has been done; we just need to make a policy decision.”

The Basel Committee members, including the U.S. Federal Reserve and European Central Bank, are still debating the level of the floor, but have rejected the possibility of the floor applying differently to certain products, such as mortgages. The panel instead backs the “simplest form -- an ‘aggregate’ output floor” on all of a bank’s assets.

Internal Models

Negotiations on the deal picked up in recent weeks after the U.S. softened its position and signaled a readiness to compromise. 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.

The level of the floor is expressed as a percentage of the requirement generated by regulator-designed models, and the discussion has focused on setting it between 70 percent and 80 percent, with many ready to settle for 75 percent. The U.S. has long been skeptical of banks’ internal models, while Europe insists the models provide more accurate assessments in many cases, because they take into account the varying riskiness of lenders’ assets.

“I wouldn’t say that 80 is off the table; I wouldn’t say that 70 is off the table,” Coen told journalists after delivering his speech. “But there is a strong central tendency for a certain ratio. And it’s got nothing to do with impact at this point, I think it’s really just in a sense almost a philosophical perspective. There is quite a concern that we’re reducing risk-sensitivity.”

Talks had been hold as President Donald Trump installed new leaders at the four U.S. regulators on the Basel Committee. Still, some European regulators in early May said it was unlikely that a deal would be reached by mid-June when the Basel Committee’s next meeting is scheduled.

‘Dark Side’

Coen said the deal will include “reasonable” amounts of time to help banks adjust to the new rules, but said the regulations cannot be postponed for too long. However, a transition is a matter for national discretion and some countries may elect to go directly to the end stage, he said.

“There could be a dark side to long transitional arrangements,” Coen said. “The more time that is granted to phase in a regulatory standard, the more time there is for dilution or backtracking.”

The leverage ratio, one of the key post-2008 crisis regulations, may be “a case in point” about the risk of transitional procedures, Coen said, adding that there continues to be “much discussion about its impact and ways to mute its impact.” The Basel Committee is continuing to monitor the impact, particularly on the derivatives market, “but will ultimately be driven by our interest in ensuring that banks maintain levels of capital sufficient to support their key role in providing clearing services.”

With agreement already reached on most elements of the Basel III reform, including an overhaul of the standardized approach for measuring credit risk and new rules for operational risk, the output floor is the last hurdle regulators need to clear.

“Nothing is agreed until everything is agreed,” Coen said. “It was all negotiated, all worked on, as a package, knowing that the very last piece of the puzzle would be the floor.”

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