Basel capital floor proposals 'unacceptable,' Bank of France head says

Bank of France Governor François Villeroy de Galhau on June 16 called for international regulators to lower their minimum capital proposals for the banking sector, saying a proposed 75% "output floor" for calculating asset riskiness was "unacceptable" and would act as a strait-jacket on the financial sector.

Negotiations were postponed in January on work to finalize the Basel III package of regulatory reforms enacted after the global financial crisis. The last piece of the puzzle revolves around how lenders calculate the riskiness of their assets, proposals for which are so sweeping as to have been dubbed "Basel IV" by much of the world's financial sector.

The most controversial peg of the reforms is a so-called output floor, which would constrain banks using a custom "internal model" to determine the riskiness of assets, by imposing a requirement that the output of the calculation process be no less than a set percentage of what would result from using a standardized model. The head of the Basel Committee, Stefan Ingves, was reported in early June to have insisted in an internal memo on imposing a 75% floor, a level many in Europe consider to be too high.

The Basel Committee met in Sweden on June 14 and 15, but was unable to come to an agreement.

"If an output floor at 75% is unacceptable, it is because the floor would become the standard model and would be a constraint for half of international banks," Villeroy de Galhau told a conference in Paris, adding that although he was in favor of finalizing the Basel accords, it had to be done in a way that would strengthen supervision of banks' internal models.

"An agreement must thus be made at a lower level, along with a strengthening of the control of internal models, as is the case with the Single Supervisory Mechanism, the so-called TRIM model review exercise, of which we are quite willing to open the results to peer reviews," he said. The ECB's targeted review of internal models, or TRIM, is expected to lead to some banks having to strengthen their capital buffers, although not to the extent that the Basel IV proposals would require.

France has been an open critic of the Basel IV negotiations, and Villeroy de Galhau, a member of the ECB's Governing Council, noted that Germany, the Netherlands and the European Commission shared his viewpoint.

He also said signs that the U.S. was pulling back from established Basel III rules were "worrying."

"Unilateral deregulation would be a loser-loser game, with serious consequences for both the stability of the global financial system and competition between U.S. and European banks," he said, adding that any rollback on international cooperation on financial reform would be "dangerous" and would heighten the probability of a new financial crisis.

Villeroy de Galhau also called for greater regulation of financial technology and digital platforms, saying that if they wanted to be active in the financial sector, they would have to accept the same regulations as banks.

He also applauded moves by the EC to require systemically important clearing houses to establish themselves within the EU to clear euro-denominated derivatives.

"This is the only viable way to ensure that the European authorities, and in particular central banks, control and master the risks that clearing houses may pose to the financial stability of the European Union," he said.

Roughly three-quarters of euro-denominated derivatives, worth $574 billion a day, are cleared through London, raising concerns about the future supervision of the business once the U.K. leaves the EU.