The oversight body of the Basel Committee on Banking Supervision, the Group of Governors and Heads of Supervision (GHOS), resolved the finalisation of the Basel III reform package on 7 December 2017. Following intensive and difficult negotiations, agreement was reached on the last outstanding point and the output floor for risk-weighted assets was fixed at 72.5 percent.¹ The purpose of the output floor is to curb the unintentionally large deviations in capital requirements which banks calculate using their internal models. It will be introduced in stages over a period of five years starting on 1 January 2022.

The compromise reached in December 2017 includes many important German positions which have now been incorporated in the Basel regulatory framework. For example, the standardised approaches are significantly more risk-sensitive and institutions will continue to be able to use internal models for almost all exposure classes. There had been repeated attempts in recent years to discredit internal models completely and eliminate the risk-sensitive approach, explained BaFin President Hufeld, who represented Germany in the GHOS together with Bundesbank President Jens Weidmann. 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 fought off those attempts."²

Compromise on the limits of acceptability

BaFin is of the opinion that the increase in capital requirements resulting from the Basel compromise is acceptable for German institutions. "The compromise is probably right on the limits of what BaFin could accept with the result that we were just about able to agree ", comments Hufeld. Significant increases can be expected in particular cases. On the other hand, some institutions are likely to see a reduction in capital requirements compared with the present position. This is due to the changes to the standardised approach for credit risk and in relation to operational risk.

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