Bank Regulators Seek Washington Breakthrough in Basel Talks

Updated on
  • Autonomous Research sees RWAs rising for 40 European banks
  • Meetings in Washington this week may bring further progress

A decade on from the last financial crisis, global regulators are close to putting the finishing touches on bank capital rules intended to prevent the next one.

Negotiators in the Basel Committee on Banking Supervision last week came up with a plan to break a year-long deadlock that has delayed completion of the Basel III capital standards, according to people with knowledge of the talks. A final deal must be approved by the central bank governors and supervisors on the Basel Committee’s oversight body.

The last big stumbling block in the talks is a measure that restricts how low banks can drive their capital requirements by measuring asset risk with their own statistical models. Europe has been pushing for a floor set at 70 percent of the result yielded by using a standard formula set by regulators; the U.S. wants 75 percent. Negotiators split the difference and settled on a 72.5 percent floor, one of the people said.

Whether that’s enough to satisfy France, the staunchest opponent of the floor, remains to be seen. The next step could come as soon as this week, when central bankers including Francois Villeroy de Galhau, governor of the Bank of France, descend on Washington for a series of international meetings, the people said, asking not to be identified because the deliberations are private. 

‘New Discussions’

“It’s a negotiation led by central banks,” French Finance Minister Bruno Le Maire said in Luxembourg on Tuesday. “Our position is clear. We will have new discussions in Washington,” he said, reiterating the French insistence that the new Basel rules shouldn’t result in “major increases on capital requirements.”

An output floor of 72.5 percent would increase the risk-weighted assets of Europe’s top 40 banks on aggregate by 14 percent, Autonomous Research analyst Stuart Graham said on Tuesday. At 75 percent, risk-weighted assets would expand by 17 percent. That increase in Europe “is consistent with” about 5 to 10 percent globally, he said.

The biggest drivers of this increase are mortgages and large-scale corporate lending. As capital requirements are expressed in relation to risk-weighted assets, their increase means capital ratios will slip accordingly.

Bundesbank board member Andreas Dombret said on Oct. 9 that the talks are “getting closer and closer” to an agreement. Pressure for a breakthrough has been rising in recent weeks, with Sabine Lautenschlaeger, a member of the European Central Bank’s Executive Board, warning that “all banks will struggle if there is no agreement” by year-end. Yet Villeroy de Galhau has cautioned that any solution must “take on board” all countries represented on the committee.

Internal Models

The Basel Committee brings together regulators from around the world, including the Bundesbank, the ECB, the Bank of France, the U.S. Federal Reserve and Japan’s Financial Services Agency.

European and Japanese regulators, whose banks are avid users of internal models, warn that if the output floor is too high, it will punish banks with lots of low-risk assets. France, with four global banking behemoths led by BNP Paribas SA, has been the most outspoken opponent of the floor. Villeroy de Galhau has said that 75 percent is unacceptable “because it would mean that this floor, and thus the standardized approach, would be the constraint for half of the international banks.”

The Fed has been the strongest advocate of a strict floor, which it says is needed to prevent banks from gaming the system. With both sides dug in, the talks have been deadlocked since regulators got close to a deal in Santiago, Chile, late last year.

The Basel Committee hasn’t published results of its quantitative impact study measuring the effect the floor would have on capital ratios. A number of analysts have made estimates based on an earlier proposal to phase in the floor to 75 percent by 2027.

Under this assumption, European banks’ common equity Tier 1 capital ratio would decline by 240 basis points in the final stage, Morgan Stanley analysts said last month. Scandinavian, Dutch and Swiss banks would be most affected by the measures, they said. But thanks to the long phase-in period, the analysts “do not expect any capital action or dividend cuts to take place on the back” of the proposed measures, they said in a note to clients.

— With assistance by Silla Brush, Birgit Jennen, Alexander Weber, Carolynn Look, Yalman Onaran, Helene Fouquet, and Alessandra Migliaccio

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