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Capital Markets

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Categorized | Banks

Basel Committe fail to sign off on latest bank reform measures

Posted on November 30, 2016

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis.

Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official said a key element will have to be decided later -meaning the Basel Committee on Banking Supervision will likely miss a self-imposed target of completing the reform package by the end of the year.

At issue is how banks can use their internal models to determine the riskiness of their loans, an area on which US and European policymakers have publicly clashed on.

The reforms are an attempt to stop banks gaming rules put in place in the wake of the financial crisis, known as Basel III. Banks argue the reform package amounts to another capital-raising exercise by the backdoor, dubbing it “Basel IV”- something policy makers strongly push back against.

The US – at least under its current administration – is pushing for output floors, which would restrict banks’ use of models to assess their loan books. But European banks and politicians have warned that such a measure will disproportionately hit their balance sheets since European banks hold most of their mortgages themselves whereas US banks typically sell them on.

While the Chile talks forged an agreement around output floors, there is still no consensus on what level they should be set at, a senior Basel Committee official said on Wednesday.

“I expect an output floor will be part of our package of reforms. It will be based on the standardised approaches and the final calibration of the floor is subject to endorsement by the GHoS,” said Stefan Ingves, chairman of the Basel Committee who is also governor of the Swedish central bank.

GHoS is the Basel Committee’s supervisory board and is chaired by Mario Draghi, governor of the European Central Bank. The board is next expected to meet in January – although it could convene again before the end of the year – meaning no clarity on the final level of an output floor will happen until then. The committee had pledged for at least the last two years to finish the reforms by the end of 2016.

Mr Ingves’s speech, published after the meeting in Chile, revealed “the contours of an agreement” reached by the various countries that are members of the Basel Committee, which sets global minimum standards for banks.