US and EU banks face different Basel III floors

Regulators have proposed an overhaul of the US capital framework in a long-awaited response to Basel III and Basel 2.5 – but there are differences to the European version of the rules.

US regulators took a step towards a new bank regulatory framework by issuing three sets of proposals on June 7 that are modelled on the internationally agreed Basel III reforms, while also finalising previous proposals on the Basel 2.5 trading book rules. The move helps address concerns among Europe’s bankers that the US would not adopt the agenda set by the Basel Committee on Banking Supervision – there is still resentment that US banks are not subject to the previous round of reforms, Basel II.

“This has been long-awaited. Other countries have come out with their proposals, but with the US proposals, you really have full global implementation of Basel III. It’s also notable that Basel 2.5 was fully implemented, which brings the US into line with the rest of the world on Basel 2.5 implementation,” says Stefan Walter, a New York-based principal at Ernst & Young, who was secretary-general of the Basel Committee while the new prudential regime was drafted.

There are differences between the US and European versions of the rules, though. Notably, while each contains floors below which banks are not allowed to go when using internal models to calculate regulatory capital, the thresholds vary. The US proposals incorporate the controversial Collins amendment, part of the Dodd-Frank Act that subjects capital requirements in the US to two floors. First, it stipulates that capital requirements for more complex firms cannot be lower than those applicable to most US banks. Second, it says minimum capital requirements cannot be lower than those applicable in July 2010, when the act was signed into law.

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