19 December 2016

EBF letter to the Basel Committee: Finalisation of Basel III without output floors

The compromise package that the Basel Committee is, reportedly, preparing after its meeting of 28 November in Santiago, includes a few interesting improvements over the original proposals, however the output floor seems to remain there.

This is a major point of concern for the interest of the EU. The output floor is the binding factor for the EU banking system affecting the best quality assets. It would become the major prudential constraint to finance and economic growth in the EU. 

EBF would like to reiterate the firm stance of the EBF against the use of output floors in the final BCBS standards and in favour of maintaining the use of IRBA models for corporate financing. The EBA is conducting a technical and thorough review of internal risk modelling practices in Europe, including benchmarking exercises, and the SSM has put in place an ambitious program of review of internal models under its remit. In addition, any sort of output floor would overlap and complicate the sheer backstop measure at international level which is the leverage ratio. 

Against this background, Europe should not accept the imposition of an indiscriminate output floor that would put its banks and its economy at a disadvantage vis-a-vis those of jurisdictions that would not be hit by such output floor, notably the US.  EBF would like to recall that the regulatory pressure in Europe is similar, if not greater, than in the US.

The use of an output floor would tilt the balance against the EU banks and their clients, due to three material differences:

• mortgage loans remain on the balance sheet of banks until maturity;
• finance to the economy is highly dependent on banks; and,
• European banks are subject to a significant Pillar 2 capital requirement, on average around 4% of risk-weighted assets (RWA), that the BCBS does not seem to factor in when it compares the regulatory requirement bar in the EU with that of the US.

Full letter

© EBF