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Mario Draghi said the endorsement of the Basel III reforms represents a major milestone that will improve confidence in banking.
Mario Draghi said the endorsement of the Basel III reforms represents a major milestone that will improve confidence in banking.

Global Regulators Reach Deal on Tougher Capital Rules

The Basel III rules require banks to hold more capital—another way of saying that they must rely less on borrowed money, so that they can absorb losses without collapsing

Global Regulators Reach Deal on Tougher Capital Rules

Regulators from around the world polished off the final set of new regulations for banks in Frankfurt on Thursday, the Basel Committee on Banking Supervision said in a statement, closing a saga begun at the height of the financial crisis.

Completing the so-called “Basel III” reforms “represents a major milestone that will make the capital framework more robust and improve confidence in banking systems,” European Central Bank President Mario Draghi said after the meeting, which brought together regulators and central banks from 28 countries, including major advanced economies like the United States and the European Union as well as emerging nations such as China, India and Brazil, AFP reported.

The committee–named after its headquarters at the Bank for International Settlements in Basel, Switzerland–agreed a final set of rules to complete a new round of bank regulation begun in mid-2010.

They include compromises on how regulators treat the risks banks run from their lending business, from financial market activities and from “operational risks” including human error.

In particular, the deal puts an end to EU-US wrangling over how to calculate the amount of capital banks must keep on hand to weather financial shocks.

Banks’ use of their own internal models rather than the standard calculations used by regulators had led to “imprudently low levels of capital” at some lenders in the past, Draghi said. He added that a “key policy lever” of Thursday’s agreement was a rule that banks’ judgment of their own capital requirements cannot vary too far from the regulator’s view.

And the committee also pushed back deadlines, giving lawmakers time to implement the new global rules and banks time to prepare for their application.

The Basel III rules require banks to hold more capital—another way of saying that they must rely less on borrowed money, so that they can absorb losses without collapsing.

Only a Recommendation

In theory, the agreement is only a recommendation with no legally binding effect on the participating countries. But states generally follow their financial experts’ lead by passing the deals into law.

“Now that the Basel III regulatory reform agenda is complete, we must focus on the important task of ensuring the standards are implemented consistently around the world,” Basel Committee chairman and Swedish central bank chief Stefan Ingves said, a task Draghi added would be “equally difficult” to achieving the hard-fought compromises.

Most of the changes are expected to only take effect from 2022. “It is now essential that all major jurisdictions implement all elements of this agreement,” European Commission vice-president Valdis Dombrovskis said in a statement.

“We will be in better shape when this is implemented,” said Stefan Ingves, who is chairman of the Basel Committee on Banking Supervision and governor of Sveriges Riksbank, the Swedish central bank. “At the same time,” he said, “it’s impossible to know what’s in store for the future.”

European Stonewalling

Until last month France and Germany had opposed a draft agreement, because they feared it would disproportionately hit their banks. Banking officials from both countries complained that they would have to raise additional capital in order to meet the Basel IV requirements, DW reported.

The European Banking Authority had estimated that the reforms would mean an average increase in minimum capital of 12.9% for EU banks, with the bloc's 12 largest lenders even seeing a spike by 15.2%. This is because they keep more mortgages on their books than their US-based rivals, and have benefitted far more from the use of less stringent risk calculation models.

The EBA also calculated that in aggregate, EU banks would have a capital shortfall of €40 billion ($47.1 billion) as a result of the reforms.

But the agreement on a longer transition period has eventually allayed European banks' fears of having to raise capital quickly, thus ending the long-running transatlantic spat that threatened to derail the whole reform package.

One of the main lessons of the last financial crisis was that many banks that appeared healthy on paper were acutely vulnerable to disruptions in the flow of money among financial institutions. That was what happened in the atmosphere of fear and mistrust that prevailed after the collapse of the Lehman Brothers investment bank in September 2008.

 

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