Global Bank Regulators Stick to Their Guns

Global banking regulators are standing by a key reform to capital rules in defiance of opposition from Europe, potentially complicating efforts to complete work on the post-crisis framework by the end of the year.

Basel Committee on Banking Supervision Chairman Stefan Ingves said “good progress” was made during talks in Santiago, Chile, this week and the “contours” of an agreement on revisions to the capital standards known as Basel III are clear. That includes an “output floor” intended to prevent banks from gaming the rules, a proposal rejected by some top European Union policy makers.

“I expect an aggregate output floor will be part of our package of reforms,” Ingves said in a speech in Santiago Wednesday after the Basel Committee's two-day meeting. The regulator's oversight body, led by European Central Bank President Mario Draghi, will need to endorse the rule, Ingves said.

Basel Committee members, including the ECB, the U.S. Federal Reserve and Sweden's Riksbank, which Ingves also heads, are struggling to bridge deep divides between the U.S., Europe and other nations on a package of rules billed as the final international regulatory response to the 2008 financial crisis.

At issue are curbs on banks' ability to use their own complex models to estimate asset risk for setting capital requirements. The U.S. has long been skeptical of such models, while Europe and Japan insist they provide more accurate assessments in many cases. The Basel Committee is trying to rein in abuse of the models while living up to a pledge that capital requirements won't increase significantly as a result of the revised rules.

Andreas Dombret, a member of the Bundesbank Executive Board, said preventing the introduction of an output floor was a priority for Germany. The Bundesbank is also a Basel member. Policy makers including Dombret have said that while they want to reach a global agreement, they may walk away if key demands aren't met.

Bundesbank President Jens Weidmann said in Berlin on Wednesday that the talks in Santiago helped narrow differences and resolve open issues. “We will work vigorously to conclude negotiations by early January,” he added. “Regulatory uncertainty is a burden on the proper functioning of the banking sector.”

Valdis Dombrovskis, the EU's financial services chief, said this week that the bloc is taking a “constructive” approach to the Basel Committee talks and seeks a “balanced” solution. Like Dombret, Dombrovskis has said capital floors should be scrapped.

Ingves said the Basel Committee will deliver on its goal of reducing the excessive variability in risk-weighted assets without boosting overall capital requirements. This doesn't mean capital charges won't rise for some firms, however.

Capital Shortfalls

“Capital requirements may go down for some banks and go up for others,” he said. “At the global, aggregate level, the impact is not significant, but it may well be significant for some banks.” The capital shortfalls produced by the changes will be only “small and relatively concentrated,” he said.

A revised standardized approach for calculating operational risk, which encompasses the impact of litigation, misconduct and cyber crime, will be “capital-neutral overall, but there will no doubt be increases and decreases in operational risk capital requirements for certain banks,” Ingves said.

That's in line with comments by Bank of England Governor Mark Carney, who said the Basel Committee's initial proposal on operational risk would drive up capital requirements “substantially.” As a result, Carney said he expected “that element of the original package will be taken off the table effectively, or will be substantially reduced.”

While Basel Committee members didn't conclude a deal during their meeting, discussions are continuing informally, since most members remain in Santiago for an international conference, according to a person familiar with the talks. An additional meeting may be needed to wrap up the work, the person said.

Ingves was succinct: “It is time to get the job done.”

Bloomberg News

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