After lengthy negotiations, the Basel III reforms were finalised in December 2017. The oversight body of the Basel Committee, the Group of Governors and Heads of Supervision (GHOS), formally adopted a compromise, agreeing, among other things, an output floor of 72.5 percent for capital requirements determined by 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.

Compromise on the limits of acceptability

BaFin President Felix Hufeld, who represents Germany on the GHOS jointly with Bundesbank President Jens Weidmann, remarked that he had not been in favour of an output floor of 72.5 percent, or any output floor for that matter. "The Basel compromise is probably right on the limits of what BaFin could accept with the result that we were just about able to agree", he said.

Hufeld explained that there had been repeated attempts in recent years to discredit internal models completely and eliminate this risk-sensitive approach. He had always been clear that he would not have agreed to the Basel III compromise if that red line had been crossed. "But we successfully warded off those attempts." The standardised approach, Hufeld continued, had now been made a lot more risk-sensitive – which is what BaFin and the Bundesbank had advocated – and the use of internal models could continue, even though the risk sensitivity of this approach had been reduced. Now all the member states of the Basel Committee would have to implement the rules in their national laws – without cherry-picking or watering down any of the standards, emphasised Hufeld.

Greater proportionality in the EU

Traditionally, however, the Basel recommendations are aimed at major banks with international operations, and in the past, most members of the Basel Committee only took this target group into account. The EU, however, had decided to apply the Basel Standards to all banks. This approach has been under review since November 2016: discussions are taking place as to whether and how the regulations can be tailored more proportionately to smaller banks in the EU without compromising on stability.

BaFin is closely involved in these discussions. "It is a matter of particular importance for us to press ahead with the project to ‘venture forwards towards greater proportionality’, shoulder to shoulder with the Federal Ministry of Finance and the Bundesbank", said Hufeld. Meanwhile, Hufeld continued, a few good proposals had been brought to the European negotiating table, such as a suggestion to create an exemption for development banks, because they fulfilled a public development mandate rather than pursuing any competitive or profit targets. BaFin's view is that these types of institutions do not need standardised European regulations, but adequate national requirements. The idea of introducing a simplified net stable funding ratio for smaller banks also had merit, added Hufeld. "It would allow us to reduce the operational effort required from small institutions, while retaining access to an effective supervisory tool." The important objective, explained Hufeld, was to achieve a good result in the upcoming European negotiations using these proposals as a basis – which, as always, was "no mean feat".