Key facts
- European banks are divided on how to implement reforms to the Basel III output floor.
- The output floor limits the capital savings banks can achieve through internal models.
- Key points of contention include excluding market risk and increasing savings via credit modelling.
European banks are experiencing an unresolved dispute regarding the implementation of reforms aimed at reducing capital requirements through internal models. The core of the disagreement lies in the 'output floor,' a component of the final Basel III rules established in 2017. This rule restricts the maximum capital savings banks can achieve by using their own internal models, capping it at 72.5% of the capital calculated under the standardised approach. Some institutions advocate for excluding market risk from this calculation to achieve greater capital relief, while others are pushing for enhanced savings through more sophisticated credit modelling techniques. The lack of consensus has stalled progress on these crucial regulatory adjustments.