Possible solution to Basel III standoff

Fed’s new appointment seen as likely icebeaker

VIENNA: Bank regulators worn down after a year of butting heads over new global capital rules see a glimmer of hope emerging in Washington in the form of Randal Quarles, who’s awaiting confirmation as the US Federal Reserve’s top bank overseer.

With European countries led by France and Germany dug in on one side, and the US on the other, efforts to complete the capital standards known as Basel III have been deadlocked since regulators got close to a deal in Santiago, Chile, late last year.

The divisions only deepened after the election of President Donald Trump sowed doubts about the US commitment to global agreements.

The only potential game-changer negotiators see is the arrival of Quarles as the Fed’s vice-chairman for supervision, who could prove more flexible than his predecessor in the role, Daniel Tarullo, according to sources. Earlier this week, Senate Majority Leader Mitch McConnell scheduled a vote today on Quarles’ nomination.

“The stalemate will continue until Quarles is in there, and then the whole thing will restart, presumably with new energy,” said Nicolas Veron, a senior fellow at Brussels-based think tank Bruegel.

“The question is if the political stance of the administration makes it impossible for him to agree on a deal. I don’t think that’s the case.”

Negotiators in the Basel Committee on Banking Supervision, who meet Oct 4-5, are divided over a measure that limits how much lower banks’ estimates of asset risk generated by their own models can go compared with those produced by standard formulas set by regulators. This risk assessment is part of the process for determining a bank’s capital requirements.

European and Japanese regulators, whose banks are avid users of such models, warn that if the measure, known as an output floor, is too high, it will punish banks with low-risk assets.

The rival camp led by the Fed says a strict floor is needed to prevent banks from gaming the system. Tarullo was a staunch opponent of internal models.

The Basel Committee brings together regulators from around the world, including the Fed, the European Central Bank, the French and German central banks and Japan’s Financial Services Agency.

While Quarles hasn’t spoken much about Basel recently, his career offers some clues as to how he might approach the talks.

At the US Treasury Department from 2001 to 2006, Quarles helped to tackle issues such as a financial-services dialogue with the European Union and the financial-services pro- visions of six free-trade agreements.

In a 2005 speech, Quarles said “adherence to the international standards on capital adequacy for banking institutions embodied in the Basel accord” had been “one of the biggest contributors to financial stability”.

One year earlier, he said in testimony to Congress that close cooperation as part of the US-EU dialogue could “produce a win-win outcome for the US, Europe and the world”.

Such pronouncements feed optimism that Quarles could add fresh impetus to the Basel talks and open the way to an agreement, the sources said. At the very least, installing Quarles as the Fed’s head of supervision will put an end to European complaints over the last year about the lack of an authoritative US negotiator, a source said.

And time’s running short. Bundesbank board member Andreas Dombret said on Oct 3 that a deal is needed before the end of the year or the risk will increase that the talks drag on indefinitely.

“If we go into next year, my doubts would rise, because remember, we are working with end-2015 numbers” in the Basel committee’s impact assessment of the proposals, he said on Bloomberg TV.

“I would think that we would need to do more quantitative analysis. So there is a pressure to conclude at the end of this year.”— Bloomberg