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Preliminary Basel IV deal calls for 75% capital floor

Banks using their own internal models to calculate risk will have to post at least 75% of the capital against assets called for by standard models provided by the Basel Committee on Banking Supervision, under a preliminary deal reached by the world's top banking regulator.

The capital floor requirement is included in a package of reforms to risk-weighting rules that will be sent to the Basel Committee's governing body, the Group of Governors and Heads of Supervision, in the new year, S&P Global Market Intelligence understands.

The proposed rules, which could still change but have been agreed in principle, would be phased in by 2025. They also include a 1% surcharge on the leverage ratio for global systemically important banks included in the Financial Stability Board's 2% capital-surcharge bucket or higher.

The changes to risk-weighting rules, which are meant to finalize the Basel III post-crisis regulatory reforms but were widely dubbed Basel IV, were long resisted by European banks fearful that they would force them to raise more capital, particularly against their large portfolios of mortgage and corporate loans.

European officials said they would refuse to implement rules that led to significant rises in capital charges, but the Basel Committee deal suggests that they may have been won over.

Proponents of the rule changes argued that some banks were taking advantage of their ability to use internal models to game the system and minimize capital charges. Officials from the U.S., where banks remove mortgages from their books by selling them to Fannie Mae or Freddie Mac and companies rely more on bond markets for financing, broadly supported the changes.