"I remain confident that we will finalise the remaining Basel III reforms, and I think we could do it by this autumn. But it’s a complicated issue and it is being discussed at very senior levels,” says Bill Coen, secretary general of the Basel Committee on Banking Supervision (BCBS).

The hold up on signing off on the rules has mainly centred on a disagreement over the level of output floors on bank internal models, designed to restrict them from deviating too much from the standardised approach. Latest reports suggest that it has come down to either a floor of 70% as pushed for by the Europeans or 75% as demanded by the US. The two sides may end up meeting somewhere in the middle and/or there could be a longer phase in time, industry sources have suggested. 

There also appears to be some difficulty around agreeing the standardised approach for measuring counterparty credit risk and capital requirements for exposures to central counterparties.

Resolving the impasse is proving challenging with some sources reporting heated debates. Meanwhile, the upcoming Autumn meeting was rescheduled from September to October.

Nonetheless, numerous central bankers and supervisory heads have expressed their determination to see the framework agreed and implemented fearing that failure to do so would see the global financial system lapse into fragmentation.

Showing flexibility

Mr Coen expressed confidence in the framework as it stands, but indicated potential for flexibility if some of the measures do not perform as expected once implemented.

“By the time we get to the point of setting a standard, we have a fair degree of confidence in how the standard is going to work and the impact it will have, but we can’t say with absolute certainty what the impact of a new standard will be. This is why we have an extensive process in place to collect data on a twice yearly basis to look at the regulatory framework’s impact and the incentives,” says Mr Coen, explaining that this is due to the Committee’s thorough process of consultations and interactions with many stakeholders.

“If the standards don’t work as we expect, then we would revisit those standards,” he added. Some US, Asian and European supervisors have expressed concerns over the potential impact of the liquidity measures, the leverage ratio and the fundamental review of the trading book, for instance, and are concerned they might restrict credit flows to the economy. 

The September issue of Global Risk Regulator will carry more comments from Mr Coen as he discusses the future of the Basel Committee around developments in fintech, the US administration, future priorities and addresses issues such as accountability and shadow banking.