Basel postpones bank reform vote amid policy differences

Global financial supervisors fail to agree on latest capital rules

by: Caroline Binham and Emma Dunkley

European banks have won a reprieve from new post-crisis reforms they fear will disproportionately hit their balance sheets.

A meeting of the world’s top bank supervisors and central bankers scheduled for this weekend to consider a contentious reforms package has now been postponed, the Basel Committee‎ on Banking Supervision said on Tuesday.

The long-awaited meeting was expected to sign off a series of reforms intended to make it harder for banks to avoid the higher Basel III capital requirements that were put in place after the financial crisis.
The meeting has been delayed because key parts of the reforms are still not agreed. The committee works by consensus and has no formal enforcement powers against countries that fail to implement its reforms. A refrain throughout its history has been that “nothing is agreed until everything is agreed”.

The main sticking point between supervisors in the US and their European counterparts is the so-called output floor that limits the extent to which banks can use their own models to calculate the riskiness of their lending. The floor in effect prevents them from using risk estimates that are too far below the outputs of a standardised model devised by regulators.

Michael Lever, head of prudential regulation at AFME, which represents the biggest banks and other wholesale markets participants, welcomed the decision to do further work on the proposals.

“It is important to take the time to create a framework that is capable of accurately measuring the risks that banks are assuming and can also accommodate structural differences between banking markets in different jurisdictions,” he said.

The delay is a blow to the Basel committee, which pledged to have the reform package signed off by the end of 2016. The process is likely to last until at least March, according to Basel insiders, which means the committee will be dealing with a new US administration. There are questions about the direction financial regulation will take under Donald Trump, US president-elect, who has said he wants to roll back some areas of the rules introduced since the crisis.

The US has pushed for output floors but European banks — and recently, some policymakers — have argued the measure will force some banks to significantly increase their capital at a time when they are already subject to headwinds such as historically low interest rates and low profitability.
Some banks see the proposed rules as another round of capital-raising by the back door, and refer to the package as Basel IV.

Simon Gleeson, a partner at law firm Clifford Chance, said: “It is more of a victory for European supervisors than for EU banks; it’s avoided European supervisors having to make special concessions to EU banks that would be unattractive . . . but it gets us into the territory of kicking the can down the road.”

The Basel committee has said that while in aggregate the reform package should not result in a significant increase in capital, some individual banks may see their capital demands rise.

Mario Draghi, president of the European Central Bank, who also chairs the supervisory board of the Basel committee, said in a statement on Tuesday: “Completing Basel III is an important step towards restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal.”

There are 45 individuals who make up the central bank Governors and Heads of Supervision — akin to the committee’s board. Getting them in the same place at the same time is challenging. The most probable next date when that will happen will be the committee’s scheduled meeting in March, according to insiders.

Advisers familiar with the plans said Basel members are considering setting a floor of 55 per cent, starting in 2021. This would prevent banks’ capital needs, as calculated using their own models, from falling below 55 per cent of the capital level required under the “standard model” for calculating risk.

The floor would rise to 75 per cent by 2025.

Rob Smith, a partner at KPMG, said this increase “would be a punitive floor for a number of banks globally” and the potential changes are likely to “hurt some European banks more than their global peers”.

The floor proposals would hit banks in the Netherlands, Denmark and Sweden particularly hard because they tend to keep very low-risk mortgages on their books, while US banks sell or securitise them.

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