Delaying Basel III

By Felix Salmon
June 4, 2010
David Enrich and Damian Paletta have the latest news on the Basel III front, and the compromise seems to be coming into focus: not so much on the substance, which remains more or less intact, but rather on the timing, which could get pushed out as much as a decade.

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David Enrich and Damian Paletta have the latest news on the Basel III front, and the compromise seems to be coming into focus: not so much on the substance, which remains more or less intact, but rather on the timing, which could get pushed out as much as a decade.

Kevin Drum is OK with that:

I don’t have any problem with this. And it sounds like no one else does either. If the new requirements are stiff enough to actually make a difference, we’d be nuts to demand that banks adopt them immediately in an environment where growth is already slow, lending is anemic, and raising risk capital is difficult. The real question isn’t so much the timeframe for adopting the new rules, it’s whether the rules are any good.

This makes some sense, but as anybody who’s ever faced a deadline knows, if you commit to doing something by some far-off date, you’ll end up doing absolutely nothing until suddenly it rushes up on you.

What’s more, it’s worth remembering that Basel II was meant to be fully implemented by 2004, and still hasn’t really been adopted in the U.S., six years after that deadline. So I fear that the pushed-back deadlines for Basel III will in effect be the date at which banks start worrying about the new rules, rather than any kind of firm line in the sand.

Still, if we’re going to compromise on anything, then compromising on timing makes sense. Let’s just hope that it comes with a commitment by national regulators to hold their banks to the timetable, and to make sure they’re on course to meet that pushed-back deadline once it’s set.

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Comments
5 comments so far

One of the reasons for delay in US (and other countries’) implementation of Basle II was that it involved a big regulatory paradigm shift with a lot more room for interpretation and discretion. So there was a lot of caution/reluctance inside the regulatory bureaucracies (both in the US and in some emerging markets) to give up the quantitative rules familiar to regulators and “translate” the old rules into the new approach. Of course, the US regulators were doing a lousy job of applying their old rules, but as for adopting new rules, bureaucracies tend to be super-cautious and cling to the tried and true even if known to be inadequate.

I haven’t seen the specifics of Basle III, but it sounds like they’re going back to the old approach. They’re throwing the risk models out the window and having standards that are more “objectively measurable”. The fights within Basle will therefore be over stuff like accounting procedures and which instruments count for what in meeting standard capital, leverage, etc. requirements. Once they get international agreement, it shouldn’t be a huge deal to translate those standards into the US’s normal rule-based regulatory approach to banks.

So I expect that the delay this time isn’t for the regulators but to give banks the time to grow out of their current insolvency and not have to all rush to market for new capital. Ten years ought to be adequate. If not, we’re even more screwed today than we think.

Posted by nadezhda | Report as abusive

“Both the U.S. and Europe are also advocating regulatory models that build on their own existing rulebooks and so would give their banks a competitive edge if implemented globally, said Elliott.

The U.S. favors banks satisfying a higher leverage ratio, which would manage holdings relative to total assets, while Europe fears that would punish its banks which don’t currently face such a requirement and whose balance sheets are large yet contain a lot of low-risk securities, he said.

By contrast, Europe’s desire for banks to better account for the risk of the assets they hold is questioned by the U.S. because it would rely on banks’ own computer models, Elliott said.”

http://www.bloomberg.com/apps/news?pid=2 0601087&sid=aSZ0tCA6fHo4&pos=6

This is just buying more time for jockeying. Who knows whether any consensus will emerge from this in fact? It’s not a serious analysis of the problem, but a scrum.

Posted by DonthelibertDem | Report as abusive

Good point in remarking Basel II rules have gone unapplied
by U.S banks, I would like to remember also that little
was said about them during the Fin / Reg reform; which American financia regulator is going to be overseeing their
implementation
One problem in Europe which has been higlighted by both
the B.I.S and the ECB’s Financial Stability Report, i.e that one of the side-effects of the banks preparing for Basel III rules ( horizon: 2012) would be a likely contraction of credit.
The Financial Times came out with an interesting article
on Friday about what one could call the elephant in the room on this side of the Ocean: the European banks:
“For example, analysts at Barclays Capital recently observed that under the draft proposals for bank capital requirements put forward by the Basel committee, Crédit Agricole’s “core” capital ratio – based on its level of shareholders’ equity and retained earnings – would fall from about 8 per cent to zero.

“A rule book that, if adopted, would put France’s largest bank out of business will either be massively redrafted or there will have to be a special ‘opt out’. Either way, it renders the maths somewhat meaningless,” the analysts noted.

Posted by amsterdammer | Report as abusive

During the 1996 I was a member of the Basle I workgroup of the Swiss Banking Commission and during this time the main factor was that the large / major banks pushed through their opinions to Basle I against the say of smaller medium banks, which had no international exposure. Basle III is again a draft work of regulations not taking in mind that either ae regional and local banks in Europe, who do not deal in international transactions nor have ever dealt with financial futures.

Also it is to be seen if the US regulators will see through that the large US banks will use the set rules or not.

As amsterdammer stated each country has different legal and fiscal issues, which can not be regulated under a strict “corset” of regulations. It is upto the Central Authorities of each country to oversee the banks in the country and ensure that these have enough capital and capital reserves to do business – however this requires an effort on behalf of these central banks.

Posted by Snowknight | Report as abusive

15 months after this excellent article, we have additional problems, like the regulatory arbitrage between banking and insurance because of the different deadlines for the Basel III Accord and the Solvency II Directive.

George Lekatis
http://www.basel-iii-accord.com

Posted by George_Lekatis | Report as abusive
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