US softens Basel stance in push for deal on capital rules

A file photo of the US Federal Reserve building in Washington, DC.PHOTO: AFP
A file photo of the US Federal Reserve building in Washington, DC.PHOTO: AFP

WASHINGTON (BLOOMBERG) - The United States has softened its position in talks on global bank-capital rules, easing a months-long deadlock with the European Union and boosting the chances of a deal.

The Federal Reserve, which leads the US delegation in the Basel Committee on Banking Supervision, is ready to compromise on the level of a disputed output floor, according to two people with knowledge of the talks. The floor is a blunt check on how much lower banks' own estimates of asset risk can be compared with those produced by standard formulas set by regulators. 

This could help bridge the gap between the US, which has long been skeptical of banks' internal models, and Europe, which insists the models provide more accurate assessments in many cases. The two sides have been at loggerheads since late last year. In the intervening months, EU regulators said the talks were on hold while President Donald Trump installed new faces at the four US institutions in the Basel Committee.

The Basel Committee floated a compromise in December under which banks' measurements of asset risk using internal models can't drop below 75 per cent of the result yielded by standard formulas set by regulators. Efforts to complete an agreement collapsed later that month, as the EU dug in its heels to oppose rules it said would penalize the bloc's banks and stifle lending.

In the aftermath, the US and EU backed away from the 75 per cent figure, but US negotiators are once again prepared to continue talks at this level, as other countries have also signaled their support, one of the people said, declining to be identified because the talks are private. A Fed spokesman declined to comment on the negotiations.

Felix Hufeld, head of German supervisor BaFin, a Basel Committee member, said on Tuesday that while he seeks "an acceptable common solution, one with which we can all live," this isn't the same as "a compromise at any price." The "design and calibration" of the floor for internal models are still on the Basel Committee's agenda, Mr Hufeld said. "If we set this floor too high, we strangle risk sensitivity and this would be very damaging in my view." The Basel Committee's next scheduled meeting is June 14-15.