Final Basel III rules meet resistance from Europe

LONDON • Global banking regulators are standing by a key reform of capital rules in defiance of opposition from Europe, potentially complicating efforts to complete work on the post-financial crisis framework by the end of the year.

Basel Committee on Banking Supervision chairman Stefan Ingves said that "good progress" had been made during talks in Santiago, Chile, this week and that the "contours" of an agreement on revisions to the capital standards, known as Basel III, were clear.

That includes an "output floor" intended to prevent banks from gaming the rules, a proposal rejected by some top European Union policymakers.

"I expect an aggregate output floor will be part of our package of reforms," Mr Ingves said in a speech in Santiago on Wednesday after the Basel committee's two-day meeting.

The regulator's oversight body, led by European Central Bank (ECB) president Mario Draghi, would need to endorse the rule, Mr Ingves said.

Basel committee members, including the ECB, the United States Federal Reserve and Sweden's Riksbank, which Mr Ingves also heads, are struggling to bridge deep divides between the US, Europe and other nations on a package of rules billed as the final international regulatory response to the 2008 financial crisis.

At issue are curbs on banks' ability to use their own complex models to estimate asset risk for setting capital requirements.

The US has long been sceptical of such models, while Europe and Japan insist they provide more accurate assessments in many cases.

The Basel committee is trying to rein in abuse of the models while living up to a pledge that capital requirements will not increase significantly as a result of the revised rules.

Mr Andreas Dombret, a member of the Bundesbank executive board, said preventing the introduction of an output floor was a priority for Germany. The Bundesbank is also a Basel member.

Policymakers including Mr Dombret have said that while they want to reach a global agreement, they may walk away if key demands are not met.

Bundesbank president Jens Weidmann said in Berlin on Wednesday that the talks in Santiago had helped to narrow differences and resolve open issues.

"We will work vigorously to conclude negotiations by early January," he said. "Regulatory uncertainty is a burden on the proper functioning of the banking sector."

  While Basel committee members did not conclude a deal during their meeting, discussions are continuing informally, since most members remain in Santiago for an international conference, according to a person familiar with the talks. An additional meeting may be needed to wrap up the work, the person said.

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A version of this article appeared in the print edition of The Straits Times on December 02, 2016, with the headline 'Final Basel III rules meet resistance from Europe'. Print Edition | Subscribe