A prominent member of the German central bank's executive board has given tacit approval to a proposed compromise over banking rules that have been dubbed Basel IV because of their sweeping nature.
Deutsche Bundesbank executive board member Andreas Dombret said at an event in London that the central bank still considers a proposed 72.5% output floor to be too high but that the compromise figure is nevertheless acceptable. The floor would cap the extent to which banks are able to use internal models to calculate the riskiness of assets, with the floor representing the lowest possible risk weight that a model can generate as a share of what a so-called standardized model would produce.
The Basel Committee on Banking Supervision, which is weighing the imposition of an output floor as it works to finalize the Basel III package of post-crisis bank reforms, has scheduled a press conference for Dec. 7, when a meeting will take place in Frankfurt of the Group of Central Bank Governors and Heads of Supervision, or GHOS, which must approve the final version.
Speaking at a European Banking Authority policy research workshop in London, Dombret said that although internal risk models pose challenges — namely data limitations and methodological shortcomings — they should be supported nevertheless.
"And for me, the current state of negotiations [on Basel III] — an output floor of 72.5% — is too high; but it is still enough for models to remain an attractive tool. While risk sensitivity will be diminished by setting the output floor at this level, it still represents a far better outcome than the originally envisioned output floor of 80%," he added.
Banks must "implement the Basel III compromise in a rigorous way," Dombret said. This will prevent "the internal calculations of regulatory capital requirements from going too low," while allowing "substantial freedoms for banks to calculate regulatory capital."
