France Holds Out as Bank Regulators Drive for Basel Overhaul

Updated on
  • The French have staunchly opposed proposed Basel III changes
  • Basel Committee members convene in Lulea, Sweden, June 14-15

Global bank regulators have been toiling for a decade on capital rules intended to help prevent another financial crisis. Now they’re within touching distance of a final deal, with one main obstacle standing in their way: France.

The U.S. and Europe have long been at loggerheads over measures to stop banks from gaming the capital rules known as Basel III. The U.S. insisted on tough curbs, while Europe, led by Germany and France, pushed a softer line. But while the U.S. and Germany have recently shown a willingness to compromise, France has dug in its heels, according to four people with knowledge of the negotiations. 

The Basel Committee on Banking Supervision, which sets the capital standards, holds its next meeting June 14-15 in Lulea, Sweden. In a letter last month to the Basel Committee’s oversight body, the regulator’s chairman, Stefan Ingves, said the “vast majority” of members supported a compromise proposal on the last big sticking point in Basel III, a so-called output floor. 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.

If the French don’t come around, the members of the committee, including the U.S. Federal Reserve and European Central Bank, will have a decision to make: let the talks drag on even longer, or break with tradition and do a deal without them. The outcome will depend in large part on whether Fed Chair Janet Yellen and Bundesbank President Jens Weidmann can convince their French colleague to get on board, the people said.

‘Competitive Advantage’

France has “the most too-big-to-fail banks in continental Europe,” and they “are realizing a particularly large competitive advantage from the internal risk models,” said Christian Stiefmueller, a senior policy analyst at the independent watchdog Finance Watch in Brussels. “The more big banks you have trying to protect that advantage, the more political momentum you have.”

While banks in other countries such as Sweden also benefit from risk-modeling, “when it comes to size and political weight, the French banks are a step ahead,” he said.

The Basel Committee makes decisions by consensus, giving individual countries a lot of sway. On at least one occasion, however, a decision was announced over a member’s objection.

William Coen, secretary general of the Basel Committee, said on May 25 that the technical work had been completed on planned revisions to Basel III. The “final piece of the jigsaw” is where to set the output floor, which limits how much lower banks’ estimates of risk generated by their own models can go compared with those produced by standard formulas set by regulators.

Most countries back setting the floor at 75 percent of the standardized result, Ingves wrote in the letter, which was seen by Bloomberg. Under the compromise plan, the level would begin to phase in at 45 percent in 2021, rising to 75 percent in 2027, he said.

‘Higher Costs’

The industry renewed its concerns about the plan on Monday. “European banks do not share enthusiasm for an output floor,” said Wim Mijs, chief executive officer of the European Banking Federation. “It curbs the potential of bank funding and risks leading to higher costs for loans, mortgages in particular.”

The Bank of France says it’s not alone in its resistance to the compromise, and its position is shared by other European countries, according to a spokesman.

Yet while Germany hasn’t unequivocally declared its support for the proposed changes, France, with four global banking behemoths led by BNP Paribas SA, is the staunchest opponent, according to the people familiar with the talks, who asked not to be identified because the decision-making process is private.

The political transition in France, which recently elected Emmanuel Macron president and has a a two-round parliamentary election culminating on June 18, hasn’t made it easier to encourage consensus, two of the people said.

Even pushing back full implementation of the rule to 2027 -- two decades after the start of the financial crisis -- may not be enough to satisfy France. When asked to expand on the French position, the Bank of France spokesman referred to a statement by Governor Francois Villeroy de Galhau.

On May 29, Villeroy de Galhau said that while the French central bank supports completing Basel III, “we, along with other countries, particularly in the European Union, would reject a ‘Basel IV’ based too closely on the standardized method that would therefore be less effective in measuring real risks.”

If necessary, he said, “it would be better to give ourselves the time to get a good agreement rather than rush into a bad one.”

Germany and the U.S. historically were the “two main leaders” in the Basel Committee, and France normally tried to align its views with Germany’s, according to Charles Goodhart, a professor at the London School of Economics and author of a history of the regulator from 1974 to 1997.

“The French were really only prepared to stand firm against a fairly wide consensus elsewhere with German support,” Goodhart said in an interview. “If Germany and the U.S. were in agreement, it was, I won’t say almost certain, but it was highly probable that all the other countries would fall into line with them.”

Over the past year, Germany was the most vocal opponent of the output floor, threatening late last year to walk away from the talks unless its key demands were met. It opened the door to a deal this spring, as long as the floor didn’t go to far in limiting the “principle of risk sensitivity” in determining capital requirements, as Felix Hufeld, head of German supervisor BaFin, put it.

When the U.S. then softened its insistence on setting a higher floor, the prospects of an agreement improved. France hasn’t followed suit, however, according to the people with knowledge of the matter. If no agreement in reached in Lulea, it may fall to the Basel Committee’s oversight body, led by ECB President Mario Draghi, to break the deadlock.

— With assistance by Alexander Weber, Mark Deen, and Radoslav Tomek

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