The members of the oversight body of the Basel Committee on Banking Supervision, the Group of Central Bank Governors and Heads of Supervision (GHOS), settled the final unresolved issue at their meeting today by setting the output floor for capital requirements calculated using internal models at 72.5%. Bundesbank President Jens Weidmann and BaFin President Felix Hufeld represent Germany in the GHOS. “The conclusion of the Basel III reform package is important because it means that, eleven years on from the outbreak of the financial crisis, another major lesson has finally been learned. It also eliminates the regulatory uncertainty that was weighing on banks,” Bundesbank President Jens Weidmann explained. “The output floor we have now set is hardly the outcome Germany had been hoping for, but it’s a compromise that all the stakeholders can live with,” BaFin President Felix Hufeld remarked, adding, “What mattered to us was that the global banking regulation regime does not depart from the principle of risk sensitivity and that it continues to permit the use of internal models.”

The main thrust of the revised Basel rules is to curb the unintentionally large deviations in the capital requirements which banks calculate using their internal models. For banks which use their own internal models, the output floor will cap the potential capital saving these models offer at 27.5%, compared with the figure produced by a standardised approach.

“The new rules present stiff challenges which institutions will now need to get to grips with. But banks will now have nine years to gradually acclimatise to the new requirements, and that’s doable,” BaFin President Felix Hufeld noted.

BaFin and the Bundesbank firmly advocated the idea that the credit risk standardised approach should better capture actual risk content and that banks should still be able to calculate capital requirements for many portfolios using their own internal models. One successful outcome of the negotiations is that verifiably small losses in real estate lending business, which is of particular importance to the German market, can be recognised as having a risk-mitigating effect (known as the “hard test”).

“All the members of the two bodies – the GHOS and the Basel Committee – have committed to push for full and timely implementation of every element of the Basel III package in their respective countries. That was crucial for gaining our approval for the reforms,” Bundesbank President Jens Weidmann said.