Global bank regulator holds line against Europe on capital rules

[VIENNA] Global banking regulators are sticking to their guns on capital standards in the face of intense European pressure to soften planned rule-changes.

The Basel Committee on Banking Supervision will wrap up work on the post-crisis capital framework on schedule by the end of the year, William Coen, the regulator's secretary general, said on Friday. Key elements criticised by European Union policy makers will be retained, according to the text of Mr Coen's remarks in Washington.

One flashpoint is a proposed new capital floor that caps the benefit banks can gain by measuring asset risk using their own models compared with a formula set by regulators. Mr Coen said "discussions are still under way" on the floor, though Valdis Dombrovskis, the EU's financial-services chief, called last month for it to be scrapped.

The Basel Committee has made "substantial progress" toward completing the rules known as Basel III, taking into account industry responses to the proposals and its own impact studies, Mr Coen said.

"Based on these inputs, the committee will produce a final package that reduces variability in risk-weighted assets and helps restore credibility to banks' risk-based capital ratios," he said.

As it wraps up Basel III, the regulator is under instructions not to increase overall capital requirements significantly in the process. That promise, first made in January, left open the possibility that individual countries or banks could face a marked increase.

"This is not an exercise in increasing regulatory capital requirements," Mr Coen said. "However, this does not mean that the minimum capital requirement for all banks will remain the same; variability in risk-weighted assets can only be reduced if there is some impact on the outlier banks. So some banks which are genuinely outliers may face a significant increase in requirements as a result."

EU policy makers including German Finance Minister Wolfgang Schaeuble have insisted that the Basel Committee not only keep any overall increase in capital requirements to a minimum, but also ensure the rules have no "particularly negative consequences for specific regions," such as Europe.

While holding firm on the goals of the Basel III revamp, Mr Coen also indicated possible directions toward a compromise.

The Basel Committee's members, including the US Federal Reserve, the European Central Bank and Japan's Financial Services Agency, have been divided over the merits of allowing banks to model risk since the tool was introduced in Basel II a decade ago. Europe and Japan support the internal-model approach, while the US has said regulators should consider discarding it because it creates the potential for banks to game the rules.

In the current round of talks, Europe and Japan are keen to retain risk-sensitivity in the capital rules, including the use of models where appropriate. The European Commission, the EU's executive arm, doesn't believe capital floors are an "essential part of the framework," Mr Dombrovskis said.

Europe also opposes the Basel Committee's proposal to bar some asset classes from modeling entirely, and objects to the calibration of risk-weights in the standardised approach to credit risk.

Mr Coen emphasised in Washington that the reforms are a "package" of interlocking parts, and the impact of the capital floors could be softened if internal models were reined in.

"I stress the word 'package' since there are clearly trade-offs associated with the various policy levers," he said. "For example, the more weight that is placed on using standardised approaches to calculating risk-weighted assets, the less weight that is needed on other policy levers, such as input and output floors."

He also pointed out that the standardised approach could lead to lower charges for low-risk assets. This could help address concerns in Germany, the Netherlands and Scandinavian countries, where banks have large exposures to residential mortgages.

Mr Coen didn't signal any leeway on the year-end deadline for the new rules, which must be endorsed by the Basel Committee's oversight body, the Group of Governors and Heads of Supervision.

The text of his comments didn't refer to an International Monetary Fund proposal to postpone the reforms in order to get their design and calibration right.

BLOOMBERG