LONDON An outline deal on how much capital banks must hold to avoid a repeat of the financial crisis has taken shape, a top regulator said on Wednesday, despite the failure of negotiators at a two-day meeting to reach agreement on global standards.
The European Union had threatened to boycott the proposed rules unless they are diluted and agreeing a deal is seen as a litmus test for a global post-crisis regulatory consensus.
This is showing signs of fraying after a welter of rulemaking, but Stefan Ingves, chairman of the Basel Committee of banking regulators from nearly 30 countries, said "very good" progress was made on an outline deal during a meeting in Chile, which ended on Tuesday.
Basel has set itself an end-of-year deadline for a deal on measures which have been challenged by the EU and Japan who say that the proposed rules would bump up capital requirements too much and risk disturbing the flow of credit to the economy.
Meanwhile, U.S. president-elect Donald Trump has said he will scrap Dodd Frank, America's main reform of Wall Street, which includes many globally-written rules.
Basel's original proposals unleashed a major lobbying campaign by banks, later backed by European policymakers and the meeting in Chile failed to reach a final deal.
That means the pressure is now on to iron out differences in time for Basel's oversight body of central bank governors and heads of supervision (GHOS) to endorse a package in January.
The aim of the package is to end wide differences in how much capital banks across the world set aside to cover similar risks. This would be done by curbing flexibility in computer models big banks use to tot up risks on their books.
SLOW TRAIN COMING
A controversial part of the package is an "output floor" for capital, below which a bank could not go, irrespective of what their models say is the right amount.
"I expect an aggregate floor will be part of our package of reforms," Ingves said in speech delivered in Chile on Wednesday.
But the final configuration of the floor is, however, subject to the endorsement of GHOS - an indication of how the most controversial parts of the package will need to be brokered by the committee's political masters.
Ingves said that at a "high level" the package, which completes a post-financial crisis bank capital reform known as Basel III, includes all the main elements Basel had proposed - a sign that no key element has been completely ditched so far.
But changes are being made to all the main elements.
The package will include a revised "standardized" approach for banks to assess risks from loans, which will be "neutral" in terms of its impact on capital requirements, Ingves said.
The use of internal models by big banks will be "largely" retained - reassurance for European banks, where many are in use. And a revised method of measuring operational risks like fines for misconduct, will replace existing methods.
"It is important to note that a lengthy implementation and phase-in period is likely to be part of this package," said Ingves, who is also governor of Sweden's central bank.
World leaders and GHOS, chaired by European Central Bank President Mario Draghi, have agreed that the package of rules should not significantly increase the amount of capital in the overall banking system.
"I am confident that the changes that the committee has agreed move in that direction," Ingves said.
Central bankers say the changes will help reduce investor scepticism in the capital ratios banks publish and thereby help improve their market valuations.
(Editing by Alexander Smith)