Global regulators will soon finalise a suite of rules to ensure banks across the world hold enough capital to withstand rocky markets without taxpayer aid, one of their top officials said on Thursday. The Basel Committee had hoped for a deal in January, but its members could not agree on how to set a capital backstop known as an aggregate output floor, which ensures a minimum level of capital.
The floor and other new rules complete Basel III, the world's core regulatory response to a global banking crisis that began in 2007. Much of Basel III has already been implemented. US President Donald Trump's call to ease regulation on banks to try to boost lending to the economy, and threats by the European Union to stop the new rules if they forced European banks to find large amounts of fresh capital, have cast some doubt over the reforms.
The committee's secretary general William Coen said setting the output floor was the "one piece of unfinished business". "Given the very broad support for reaching an agreement from all stakeholders, including the banking industry, I am hopeful that we can finalise the reforms in the near future," Coen told a financial conference. A banking industry official in Europe said a deal could come at the committee's next meeting on June 14-15. It would need to be formally endorsed by its oversight body.
"We have had many false dawns, but I am hearing a deal is very close. There was a concern the US would be absent from the discussions, but that has not happened," the banker said. Federal Reserve Chair Janet Yellen and US Treasury Secretary Steve Mnuchin ensured that talks continued, people familiar with the negotiations said. Banks have dubbed the package "Basel IV" or a step change in capital requirements, and the Group of 20 Economies (G20) ruled it should not significantly bump up capital. A deal in June could be presented to the next G20 meeting in July.
"Everyone around the table wants to get this finished," Coen told reporters. "The industry has been quite vocal, telling their supervisors and central banks that you have to finish this." The remaining elements of Basel III seek to ensure banks are consistent in the way they assess risks from loans and determine the size of their capital reserves. Regulators are tightening the rules on the use of computer models at big banks to tot up risks from loans and work out how much capital they should hold.
Basel had initially proposed that capital could not fall below a floor of 60-90 percent of the amount a bank would need if it had used the "standard" calculation used by the vast majority of lenders globally. "We have narrowed the range down. There is a strong central tendency for a certain ratio," Coen told reporters. He singled out a 70-75 percent floor in his speech, the range bankers now expect to be agreed. Banks will have up to a decade to adapt.
Basel III was agreed in 2010, but full implementation won't be until 2019, Coen said. "I suspect a similar approach will be taken for this set of revisions." The European banker said Basel could also start the floor as low as 55 percent and build up slowly. "That is a consideration," Coen said.