Basel bank deal likely to 'split difference' on 70-to-80 percent capital floor, Coen says

19 October 2017 3:57pm

16 October 2017. By Neil Roland.

Basel III negotiators are likely to "split the difference" on a long-running dispute about whether banks should have to set aside capital of at least 70 percent or 80 percent of the level calculated from standard risk weights, William Coen, secretary general of the Basel Committee on Banking Supervision, told MLex.

The disagreement among regulators who make up the global committee is the last issue holding up completion of the post-crisis Basel III deal, expected soon, he said in an interview on the sidelines of a Washington conference.*

"Why all of a sudden is a floor of 70 or 75 such an issue when we had 80 all along?" Coen said Friday. "The problem is people didn't put it into place. I guess it's the original sin."

Asked where negotiators will likely end up in current talks, he replied: "We'll do things as we often do and split the difference."

As for when the agreement would be consummated, Coen said: "At very senior levels, everyone is really keen to bring this to a close. No one wants to walk away, everyone wants to finish."

Negotiators have been hoping for a deal on standardized floors as early as January 2017.

'Incredible variability'

The floor seeks to limit the "incredible variability" in capital set aside by banks as a result of their own risk models, Coen said. The minimum will help "restore the credibility of risk-weighted capital ratios," he said in a speech Friday (see here).

Banks often game their models to reduce capital, International Monetary Fund officials have said.

Basel II, adopted in 2004, introduced an 80 percent standard using risk weights based on external credit ratings. The accord also included an internal ratings-based approach relying on banks' internal models.

The push against keeping the floor at 80 percent was led by European regulators concerned about its impact on German, French and other banks heavily exposed to mortgages.

Switzerland-based Basel consists of central banks and financial regulators in 28 jurisdictions. Members include the US Federal Reserve, European Central Bank and Bank of Japan.

*2017 Institute of International Finance Annual Membership Meeting; Washington, DC; Oct. 13, 2017.

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