Global bank capital rules near completion 10 years after crisis

[VIENNA] 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 per cent of the result yielded by using a standard formula set by regulators; the US wants 75 per cent. Negotiators split the difference and settled on a 72.5 per cent 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.  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.

The Basel Committee brings together regulators from around the world, including the Bundesbank, the ECB, the Bank of France, the US 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 per cent 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. Analysts have made estimates based on an earlier proposal to phase in the floor to 75 per cent 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.

BLOOMBERG