Basel III reforms package closer to being finalised

A long-awaited package of reforms designed to stop banks gaming post-crisis rules will be finalised “in the near future”, according to
the head of the committee that sets global standards.

But Bill Coen, Secretary General of the Basel Committee on Banking Supervision, said after a speech in London that the reforms package
would have a lengthy implementation period, possibly running to 2025. He added that a thorny technical debate was now much more narrowly focused.

“Recall that in 2010, the committee adopted 2019 as the date by which the Basel III requirements needed to be fully phased in. I suspect a similar approach will be taken for this set of revisions,” said Mr Coen in his speech. “I am hopeful that we can finalise the reforms in the near future.”

The comments by Mr Coen come despite the reform negotiations being bogged down in a technical dispute that has pitted European banks — and latterly, politicians — against their US counterparts. Mr Coen pointed to the final calibration of a regulatory tool at the heart of the technical dispute.

US Federal Reserve chair Janet Yellen and treasury secretary Steven Mnuchin have been instrumental in moving along discussions, according to people familiar with the situation. ‎

They also said there was pressure to have the reforms finalised by the next meeting of the G20 group of nations in July.

Mr Coen said international co-operation over rules was a way to avoid fragmentation and a “race-to-the-bottom” of regulatory standards— concerns that have been heightened since the UK’s Brexit vote and the deregulatory stance of the US administration of President Donald Trump.

The committee’s planned reforms to the post-crisis “Basel III” rules have caused consternation because the banking industry sees them as another round of capital-raising by stealth, dubbing the package Basel IV — something policymakers have pushed back strongly against.

The Trump administration has also delayed progress as the committee’s members wait to see who will replace Dan Tarullo as the US’s top banking supervisor. Mr Tarullo has played a key role in discussions at the Basel Committee, which has missed various deadlines to sign off on the reforms.

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 technical dispute has centred around the so-called output floor, which 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.

The Europeans, and particularly Germany, where banks use their own models to a far greater extent, were against such a floor, fearing that it would disproportionately hit its banks, but the committee is reaching a compromise.

Mr Coen said in his speech the output floor was “simple and straightforward — a bank’s measure of risk-weighted assets (using
internal models) can in aggregate be no lower than, say, 70-75 per cent of the risk-weighted assets that would result if the bank had applied the standardised approaches to determine its risk-weighted assets”.

He added that while a range setting the floor as wide as 60 to 90 per cent had been discussed, it was now much narrower.

“The 70 to 75 per cent range is where discussions are centred,” he said. “I wouldn’t say 80 per cent is off the table, but neither is 70 per cent.”

Meanwhile, he flagged tackling regulatory arbitrage as one of the few new projects that the committee will launch over the next two years.

In particular, he singled out how banks “window dress” their balance sheets before reporting their regulatory capital as a way to game rules. He cited volatility in the repo markets — the plumbing system that underpins the trading of government bonds. This is something that has already captured the attention of the committee’s related Bank of International Settlements, dubbed “the central banker’s bank”.

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