Global regulators agree on capital ‘floor’ for remaining Basel rules

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WASHINGTON — After years of negotiations, a group of international financial regulators has reached agreement on the final handful of provisions in the Basel III global capital rules.

The Group of Governors and Heads of Supervision — the overseeing body for the international Basel Committee on Banking Supervision, which establishes international minimum banking standards — Thursday published its final rules related to implementing the capital accords.

Mario Draghi, the president of the European Central Bank and the GHOS chairman, said the agreement — which caps off almost two years of high-level, often tense negotiations between international regulators — is a major achievement, but that the work in some ways has only begun.

“We are not done in the sense that lots of work has to be done in implementing the measures that have just been agreed [to],” Draghi said. “At this point in time, the key action is to put in practice what is agreed. It is unquestionable that this measure will reduce the excessive, unwanted, and unwarranted variability in risk-weighted assets. That’s the key point of this measure.”

The new standards are sometimes referred to as Basel IV, but Draghi said he preferred to call them the “Basel III end-game.” They are aimed at reducing the variability between regulatory treatments of risk-weighted assets, and would set a “floor” below which a bank’s risk-weighted assets may not fall. This ensures regulators that a bank’s risk-weighted capital level is comparable across jurisdictions.

The final rules would require that banks must hold at least 72.5% of the risk-weighted capital required by an internationally standardized risk-based capital approach. That means that countries may develop their own approaches for assessing risk-weighted capital, and may even approve different approaches for banks within their jurisdiction, but those approaches cannot allow banks to hold less than 72.5% of the capital that they would have to hold under the standardized approach.

Stefan Ingves, chairman of the Basel Committee and governor of the Swedish central bank Sveriges Riksbank, said that the 72.5% figure was the product of compromise rather than a consensus figure that every member thought was correct. But ultimately, each of the member jurisdictions was comfortable with the capital floor, he said.

“One has to be mindful of the fact that this is a negotiation, and when you negotiate, some said they want a higher floor while others say they would prefer a lower floor,” Ingves said. “The nature of negotiation is such that when you bring something to a conclusion, 72.5% is a good number. It’s a very good number.”

Draghi said the final rules as agreed would, in the aggregate, not significantly raise capital standards for banks — a key requirement that negotiators had said was an important part of reaching an agreement.

“The focus of the exercise was not to increase capital,” Draghi said. “The main focus was on reducing the unwanted variability in risk weights — to avoid the situations that happened during the crisis and after the crisis … who basically used their internal models to produce weights that would reduce their capital needs in a way that was fiscally imprudent.”

The committee also agreed to a relatively long implementation schedule for the rules, with a full phase-in occurring in 2022. Ingves said that gives member states time to implement some aspects of the Basel III rules, such as the Fundamental Review of the Trading Book, that will require a longer runway.

“By moving to 2022, [FRTB] is coordinated with all of the other things in this package,” Ingves said. “There was consensus that we needed a bit more time to do the technical work, and by doing it in this way, we still have a well-coordinated package, while at the same time we can spend the time that is needed to do the technical work.”

How swiftly and earnestly that technical work will proceed under the Trump administration is an open question. The Treasury said in its policy blueprint that it intends to follow the Basel Committee’s recommendations, although may opt out of going further than those international standards as the Obama administration had done. But some members of the administration have bristled at the committee’s standards, which they argue outsources U.S. regulatory authority to overseas regulators.

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Risk-based capital Basel Basel Committee on Banking Supervision