International negotiations on strengthening banks’ capital requirements (finalisation of the Basel III rules), taking place within the Basel Committee, will continue on Wednesday 14 and Thursday 15 June in Luleå, Sweden.
Readers may recall that the main stumbling blocks between the Europeans and the Americans concern the revision of the minimum capital requirement thresholds (‘output floor’). Since the negotiations began, the Europeans have consistently stressed that finalising the Basel III rules must not lead to any substantial increase in the capital requirements upon European banks (see EUROPE 11713).
“It is clear that we as European banks do not share enthusiasm for an output floor. It curbs the potential of bank funding and risks leading to higher costs for loans, mortgages in particular (…). The European Commission should stick to the EU plan and support the technical work underway by the EBA and the SSM”, said the Chief Executive Officer of the European Banking Federation (EBF), Wim Mijs, on Monday 12 June.
The EBF previously expressed its concerns in December 2016, in a letter to the President of the Basel Committee, Stefan Ingves, in which it stressed that “Europe should not accept the imposition of an indiscriminate output floor that would put its banks and its economy at a disadvantage vis-à-vis those jurisdictions that would not be hit by such output floor, notably the US”.
A draft compromise is reported to provide for a threshold between 70% and 75%, calculated on an aggregate basis across all risks and phased in between 2021 and 2025. Although European banks have sought to bring the threshold down throughout the entire course of the negotiations, the EU representatives have harmonised their positions, a banking sector source told us.
Addressing the International Financial Services Forum in London on 25 May, William Coen, Secretary General of the Basel Committee, expressed optimism for a future agreement on the output floor, describing it as the “final piece of the jigsaw”.
The EBF Chief Executive Officer is hoping for a “solid and sustainable agreement, one that works in all parts of the world and for all stakeholders”.
If negotiations break down this week in Luleå, the negotiators may, as was the case in January of this year, decide to postpone discussions until October, arguing that they will need more time to finalise the package. According to the above banking sector source, this will be the last opportunity to conclude the agreement within a reasonable period of time. If no agreement is reached, responsibility will pass to the governing body of the Basel Committee, the Group of Governors and Heads of Supervision chaired by Mario Draghi, to make a decision to break the deadlock. (Original version in French by Marion Fontana)