BIS’s Coen warns of danger in delays as output floors remain stuck

Allowing too much time for phasing in new rules risks weakening final regulations, William Coen warned today (May 25).

Delays were at the forefront of audience members’ minds as the secretary-general of the Basel Committee on Banking Supervision (BCBS) spoke during a conference in London. The final agreement on Basel III remains elusive due to continuing disagreement on the calibration of “output floors”, which set minimum levels for internally modelled capital ratios.

It seems likely that when agreement is reached on the floors, which Coen is still hopeful about, a transition period will be necessary. “Given the wide range of revisions, some time is needed to allow jurisdictions to conduct their legislative and rule-writing processes, and for banks to implement the changes in their systems and processes,” he said.

Coen noted some concerns among banks that market pressure to adopt standards can force firms to implement them early, but said there was evidence of a gradual adjustment to the agreed Basel III rules.

He cited the leverage ratio as one area of concern. It is not yet an official Pillar 1 requirement, and there is ongoing debate about its impact – “and ways to mute its impact”.

“I might add that there could be a dark side to long transitional arrangements,” Coen continued. “The more time that is granted to phase in a regulatory standard, the more time there is for dilution or backtracking.”

Fighting over floors

Privately, officials have expressed concern that as the time since the 2008 crisis lengthens, the political will to implement tough regulatory reforms may be waning.

Such fatigue could help to explain why achieving agreement on output floors is proving so difficult. A further complication is that a top US regulator, the Federal Reserve’s Daniel Tarullo, resigned earlier this year and the US administration has yet to confirm a successor, leaving a major seat at the Basel negotiating table empty.

Today, Coen stressed the BCBS has “moved closer” to completing the capital framework, saying the “technical work” is done, with just the output floor calibration and final sign-off to go. Output floors already exist in the Basel framework, but they are linked to Basel I’s capital requirements and clearly need updating, he said.

If audience members were expecting a clearer timeline as to when the final sign-off may come, they were disappointed.

Coen triggered muted laughter when he said: “I am hopeful we can finalise in the near future.” He then apologised: “That’s about the best I can do. But I am confident.”