EU Abandoning Output Floor Would Be 'A Disaster', Says Former Basel Chief

The European Union's consideration of abandoning the output floor in capital rules has been met with strong opposition from Neil Esho, the former head of the Basel Committee on Banking Supervision. The output floor, established in 2017 as part of the Basel III reforms, requires banks to use a standardized approach when calculating their assets' risk levels, ensuring they don't fall below 72.5% of what an internal model would produce.

Esho warned that abandoning this rule would be 'a disaster' and 'a big step too far,' as it could create a competitive disadvantage for European banks and undermine the global framework established by the Basel Committee.

The EU's logic in considering relaxing this requirement is based on concerns about competitiveness, particularly with regards to US and Asian competitors. However, Esho cautioned that if one major jurisdiction starts pulling away from the rules, it could embolden others to do the same.

As a former top official at the BCBS, Esho had a front-row seat to the negotiations that produced these rules. His resignation in March 2023 makes his public comments particularly notable, as he called the potential EU policy move 'a disaster' and 'a big step too far.'