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Global regulators expect deal soon on finalising capital rules

[LONDON] Global regulators will soon finalise a suite of rules to ensure banks hold enough capital to withstand rocky markets without taxpayer aid, one of their top officials said on Thursday.

The Basel Committee had hoped for a deal in January, but its members could not agree on how to set a capital backstop known as an aggregate output floor, which ensures a minimum level of capital.

The floor and other new rules complete Basel III, the world's core regulatory response to a global banking crisis that began in 2007. Much of Basel III has already been implemented.

US President Donald Trump's call to ease regulation on banks in a bid to boost lending to the economy, and threats by the European Union to stop the new rules if they forced European banks to find large amounts of fresh capital, have cast some doubt over the reforms.

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The committee's secretary general William Coen said setting the output floor was the "one piece of unfinished business".

"Given the very broad support for reaching an agreement from all stakeholders, including the banking industry, I am hopeful that we can finalise the reforms in the near future," Mr Coen told a financial conference.

A banking industry official in Europe said a deal could come at the committee's next meeting on June 14-15. It would need to be formally endorsed by its oversight body.

"We have had many false dawns, but I am hearing a deal is very close. There was a concern the US would be absent from the discussions, but that has not happened," the banker said.

The remaining elements seek to ensure banks are consistent in the way they assess risks from loans and determine the size of their capital reserves.

Regulators are tightening the rules on the use of computer models at big banks to tot up risks from loans and work out how much capital they should hold.

Mr Coen said the new output floor would ensure the amount of capital would not fall to, for example, 70-75 per cent of the amount a bank would need if it had used the "standard" calculation used by the vast majority of lenders globally.

Banks will have time to adapt.

Basel III was agreed in 2010, but full implementation won't be until 2019, Coen said.

"I suspect a similar approach will be taken for this set of revisions."

The European banker said Basel could also start the floor as low as 55 per cent and build up to 70-75 per cent, the level now likely.

Banks in France and Germany would be hit most by the new floor, and there is already talk the EU may exclude mortgages from the calculation, the banker added.

With Basel III completed, Coen said a new task would be to identify "regulatory arbitrage" or the gaming of rules by banks to seek an advantage over rivals.

A separate committee of global regulators has already identified swings in the repurchase agreements, or repo, market, Mr Coen said.

These swings were likely to be a reflection of "incentives" that banks have to "window dress" or flatter their end of quarter or end of year balance sheets to ease pressure on capital requirements, Mr Coen said.

One of Basel's core reforms since the crisis, the leverage ratio or broad measure of capital, was one such incentive, he added.

"We will pay particular attention to regulatory arbitrage and determine the appropriate response, be it regulatory or supervisory," Mr Coen added.