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Deal on 'Basel IV' global bank regulations seen in coming days

The finalization of a sweeping set of changes to how banks calculate the riskiness of their assets is expected Dec. 7 at the next meeting of central bank governors, regulators and others said during a panel at the FT Banking Summit on Nov. 30 in London.

The scheduling of a meeting of the Group of Central Bank Governors and Heads of Supervision, or GHOS, which is chaired by ECB President Mario Draghi and oversees the Basel Committee of Banking Supervision, has been deemed a clear sign that regulators are nearing a deal to finalize the Basel III set of global banking reforms. The GHOS called off a meeting scheduled for January 2017 as negotiations on changes that have been dubbed Basel IV by many deadlocked, and sources told Reuters on Nov. 24 that it would not have scheduled another one if there were any chance of a repeat occurrence.

The main roadblock on the way to a successful finalization of the framework has been the so-called output floor, through which regulators are seeking to limit the extent to which banks can use internal modeling to assess the riskiness of their assets. Panelists discussing regulatory matters at the summit gave strong indications that they expect a final deal to be made in a week's time.

"From our point of view, we are heading towards some sort of an agreement and as usual it is going to be ... a compromise that probably no one is going to like entirely or dislike entirely," said John Berrigan, deputy director general in the European Commission's Directorate General of Financial Stability, Financial Services and Capital Markets Union.

Berrigan rejected the suggestion that there has been "a spat" between U.S. and EU regulators on the level of the output floor, which would limit the output of a bank's bespoke internal model for calculating risk-weighted assets to a set percentage of what would be derived using a standardized model. The latest proposal is for an output floor of 72.5%, something the Deutsche Bundesbank's Andreas Dombret has called too high but nevertheless an acceptable compromise.

Rather than an EU-U.S. conflict, what has heretofore stalled an agreement has been a discussion on principle about how to manage risks, Berrigan said. The EC's aim is to ensure that the final agreement does not have an excessive negative impact on the EU economy, he noted.

"Effectively putting a floor to an artificial level is kind of a cynical way to [manage] capital remodeling," said Eric Litvack, who is chairman of the International Swaps and Derivatives Association, as well as managing director and head of regulatory strategy in Société Générale SA's global banking and investor solutions division. He said such a floor would push European lenders to take more risks in order to "solve the equation" of the new regulatory capital requirements.

Mark Yallop, chairman of the Fixed Income, Currencies and Commodities Markets Standards Board, a voluntary organization of market participants set up in 2015, added: "We can waste an awful lot of time arguing about hypothetical floors and internal models … [but] what really matters here are the outcomes. Do different approaches to setting floors or risk weights in different parts of the world have the same outcome?"

Yallop, a former U.K. group CEO of UBS Group AG and long-time Deutsche Bank AG executive, added that, "As a banker turned regulator, I am more interested if the stress tests [of banks] in the U.S., Europe and other parts of the world are [firstly] credible and [secondly] what the results are [regardless of the floor level]."

"The good news is that when the announcement does come out on the 7th of December there will be a long transition period, so time to adapt," he added.

There was Basel IV chatter on the sidelines of the conference as well, with one Swiss banker saying: "The rules are coming next week. ... So, that's going to be big news for the banks."