Photographer: Krisztian Bocsi/Bloomberg

Global Bank Regulators Reach Deal on Tougher Capital Rules

Updated on
  • Deal includes 72.5% output floor on use of internal models
  • Leverage-ratio surcharge included for biggest global banks

Global bank regulators broke a year-long deadlock and closed the book on Basel III, a sweeping set of capital rules begun in the aftermath of the 2008 financial crisis.

The deal includes new curbs on how banks estimate the risk of mortgages, loans and other assets on their books in an effort to improve the transparency and health of lenders’ balance sheets, the Basel Committee on Banking Supervision said in a statement on Thursday.

“Today’s endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems,” Mario Draghi, chairman of the Group of Central Bank Governors and Heads of Supervision and president of the European Central Bank, said in a statement. “The package of reforms endorsed by the GHOS now completes the global reform of the regulatory framework, which began following the onset of the financial crisis.”

The final phase of Basel III is focused on the statistical models that banks use to measure their risk of losing money on investments, part of determining their capital requirements. Regulators took action when these models failed to deliver accurate risk estimates during and after the financial crisis. They also wanted to address the wide variability of results across banks, which raised concerns that lenders were gaming the rules.

The new framework restricts the options lenders have with a limit on how low banks can drive their capital requirements by measuring asset risk with their own statistical models. Top European Union officials first opposed the inclusion of this floor, then pushed for a level of 70 percent of the result yielded by using a standard formula set by regulators. The U.S. sought an 80 percent floor, later coming down to 75 percent. In the end, negotiators settled on 72.5 percent.

The agreement will decrease the weighted average CET1 ratio of European Union banks by 0.6 percentage point compared with the status quo, according to the European Banking Authority, which coordinates banking standards across the bloc. The EBA assessed the effect of the rules compared with data from December 2015 and found a total capital shortfall amounting to 39.7 billion euros ($47 billion), which may have narrowed in the intervening two years.

“The reform has a limited aggregate impact on regulatory capital ratios and capital shortfalls,” EBA said in a statement on Thursday.

— With assistance by Silla Brush

    Before it's here, it's on the Bloomberg Terminal.