Written by:
Simon Hills, Director, Prudential Policy, UK Finance

I very much hope that the  outcome of the next Basel Committee on Banking Supervision (BCBS) meeting, which has apparently  been postponed by a month, sees an agreement reached on the level of the floor on capital required of banks that use internal ratings based (IRB) credit modelling, compared to those typically smaller banks that use the standardised approach (SA).

This debate has been going on since the BCBS’s first consultation on the standardised approach to credit risk at the end of 2014. Finalisation of the Basel III framework appears to be held up by deep discussion amongst BCBS members about whether the IRB aggregate risk weighted asset output floor should be set at 70% or 75% of the SA approach requirement – hardly a big difference it would seem to me, particularly as the floor would ratchet up over a period of years and probably not be fully implemented for another decade.

The Basel Committee is committed to ensuring that the finalised regime does not significantly increasing overall capital requirements. Banks too are keen that this aspiration is adhered to and tested post implementation so that corrections can be made if a general and unexpected increase is observed.

But inevitably there will be outliers, depending on the impact of the finalised proposals on an individual bank’s business model and the level at which the floor is set. Where there is a significant increase in capital requirements these can be mitigated with sensible transition periods that allow an affected bank to adapt its business mode and raise further capital over a reasonable period.

UK Finance members and their investors need closure on this long running issue so that they can understand the impact of the finalised framework on their business models and get on with raising additional capital if necessary. Is it too simplistic to suggest that the protagonists apply the judgement of Solomon by splitting the difference and agreeing to a 72.5% floor?

Basel: An update
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