French governor sees outlines of possible Basel III deal

"The possible outlines of the final Basel III reform are becoming clearer," despite the failure to reach an agreement at the recent Santiago meeting, the governor of the Banque de France said in a speech on December 6.

François Villeroy de Galhau's statement seems to indicate certain key demands made in public by German negotiators may be accepted in the final accords. The French governor also noted that eurozone countries, and particularly France and Germany, had co-operated well at the Santiago talks.

The final reforms must not have an excessive impact on banks' capital ratios, Villeroy de Galhau said. They should aim to supervise banks' internal models rather than achieve "full-blown standardisation", he argued.

The likely outcome of Basel III included "certain portfolios remaining eligible" to be governed by internal models, he said. The Santiago meeting had also removed some "excessive technical parameters" governing both operational and credit risk, Villeroy de Galhau said.

"Guaranteed loans will be considered equivalent to mortgage loans," the French governor said. This was "a major advance for French banks" which should lower their capital requirements based on their current portfolios. There was still a "lively" debate over "the principle and calibration of an output floor", he noted.

If Villeroy de Galhau's predictions are accurate, the final Basel III accords will have accepted several points made forcefully by a senior Bundesbank figure in the run-up to Santiago.

Andreas Dombret, a Bundesbank executive board member, said on November 21 that "the Bundesbank is not prepared to reach an agreement at any price".

Dombret also said in November that output floors should not be imposed on all banks. He called for a recognition that banks' internal risk models could convert data on low loss ratios into low risk weights. He also rejected the idea that regulators should treat all real estate valuation methods the same when calculating asset ratios, saying that this penalised German banks for their more conservative approaches.