Global Bank-Capital Talks Falter as Germany Hardens Dissent

Germany stiffened its opposition to a proposed revamp of global bank capital standards, renewing a confrontation with the U.S. and putting at risk a deal on rules intended to help prevent another financial crisis.

After opening the door earlier this year to an agreement in the Basel Committee on Banking Supervision, Germany has changed tack and closed ranks with France, the staunchest critic of proposed measures to stop banks gaming the rules known as Basel III, according to people with knowledge of the matter who asked not to be identified because the talks are private.

The shift reflects German concern over the viability of international rules after the U.S. Treasury recommended delaying implementation of two standards the Basel Committee has already completed, one person said. The German government is also keen to show solidarity with France and its new president, Emmanuel Macron, the person said.

The last big sticking point in the talks is a so-called output floor, which limits how much lower banks’ estimates of asset risk generated by their own statistical models can go compared with those produced by standard formulas set by regulators. This risk assessment is part of the process for determining a bank’s capital requirements.

Stefan Ingves, the Basel Committee’s chairman, is pushing for a deal under which the floor would begin to phase in at 45 percent in 2021, rising to 75 percent in 2027. A transitional maximum risk-weight cap is also proposed for residential real-estate exposures, a major concern for many European banks. This plan is backed by the “vast majority” of Basel members, he has said.

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Outspoken Advocate

Bank of France Governor Francois Villeroy de Galhau said last week that 75 percent is unacceptable “because it would mean that this floor, and thus the standardized approach, would be the constraint for half of the international banks.”

France, with four global banking behemoths led by BNP Paribas SA, has been the staunchest opponent of the proposed floor, while the U.S. has been its most outspoken advocate.

Germany’s central bank had been leaning toward accepting the compromise, three of the people said. In response, the French took their case to the government in Berlin and found a receptive audience, one person said.

While governments aren’t represented in the Basel Committee, their support is crucial because the global standards only become binding when they are converted into national law or regulations.

Spokespeople for the Basel Committee and the Bundesbank declined to comment on the talks.

Road Map

After years of strained relations between France and Germany, Macron wants to reset the partnership to improve growth across the region and counter the populist fervor that triggered the U.K.’s decision to withdraw from the European Union. He and German Chancellor Angela Merkel have pledged to create a new “road map” for medium-term cooperation and reviving the EU.

With Germany and France pushing for the floor to be set below 75 percent, and the U.S. unlikely to soften its position further, a deal before the summer break probably isn’t in the cards, the people said. The Basel Committee is also discussing steps that could be taken to make either level more acceptable to all members, one person said.

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European Banking Federation head Wim Mijs said on June 20 that the regulator’s meeting in Sweden last week “made clear that their negotiations are still deadlocked, and that it may take months at least before an agreement could be possible.” 

“I sincerely hope that the EU Member States — finance ministers and central bankers — will remain united in their approach towards the Basel Committee,” he said.

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