Bundesbank Executive Board member Andreas Dombret has called for negotiations with the United States over the scheduled revision of the capital rules for banks (Basel III) to continue. "As far as the Bundesbank is concerned, we will stay at the negotiating table and are always ready to stake out common ground," he said at the Bundesbank symposium on banking supervision in Frankfurt am Main. The pace of negotiations isn’t decisive, he said; it’s the outcome that counts. "If the Americans do not implement the Basel III framework, we Europeans will certainly not introduce the new rules unilaterally," he added, explaining that it would be wrong to reach an agreement at any price – any compromise would need to be palatable to everyone concerned.

Don’t set the hurdles too high

There is good reason to be quite satisfied on the whole with the current status of negotiations, Mr Dombret emphasised, though there are still a few issues to resolve, including the proposal for an "output floor" – that is, the scope for variation in the capital requirements for banks which use their own internal risk models rather than what is known as the standardised approach. The idea behind setting an output floor is to prevent excessive variability in the calculation of capital requirements.

Mr Dombret said he felt that any output floor needed to calibrated carefully, remarking that "setting too high a hurdle quite simply creates the wrong incentives. After all, there are good reasons why model calculations are designed such that higher risks require more capital, and lower risks less." The Bundesbank, he stressed, would therefore stick to its position in negotiations that any output floor should not be too high. The Bundesbank Executive Board member continued by noting that a robust line of defence is already in place today, in the shape of the leverage ratio, which sets additional minimum capital requirements to prevent internal models from being abused by those looking to understate the capital they need to set aside.

Look ahead

Turning to the impact of Basel III, Mr Dombret said that, for the bulk of German institutions, the standards are manageable, with capital requirements increasing for most institutions by less than 5% on average. He reported that savings banks and cooperative banks in particular will barely be affected by the new rules or will even benefit from Basel III to an extent. "So the sense of panic observed in some quarters is no longer warranted," he reasoned. "It’s time critics came down from their barricades over Basel III and started to look ahead."

Improve resilience

Another speaker who looked to the future and used the Bundesbank symposium to endorse the envisaged reform was Stefan Ingves, Governor of Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision. Mr Ingves explained that while the negotiating partners are still divided over a number of issues, the ground between them has narrowed considerably and work is still under way to hammer out an agreement – even if it is taking longer than originally expected to wrap up the negotiations. He emphasised that the thrust of the Basel reform is not to raise capital requirements for banks at the global, aggregate level, but more a matter of making banks more resilient to financial shocks. That doesn’t necessarily mean that there won’t be a single bank which has to increase its capital requirements, he warned. But viewed overall, the effects of the reform will be neutral.

Wrong to compromise at any price

Felix Hufeld, President of the Federal Financial Supervisory Authority (BaFin), made risk sensitivity the main topic of his speech. Risk sensitivity, Mr Hufeld explained, means improving the way actual risk exposures are modelled in capital requirements. That, he reasoned, is why using internal models to calculate capital requirements is preferable whenever banks have a significant information advantage. Any move which effectively means abandoning this regulatory principle is out of the question, Mr Hufeld stressed. In comments that supported Mr Dombret’s stance, Mr Hufeld made it plain that this is another instance where the German side is not prepared to compromise at any price. Mr Hufeld was nonetheless optimistic that the Basel III negotiations will be brought to a successful conclusion. A healthy degree of pragmatism, he hoped, would carry negotiations over the finishing line.