ANALYSIS-Bank capital rules are regulatory drive’s top test

By Reuters Staff
May 4, 2010

By Huw Jones

LONDON, May 4 (Reuters) – This month could bring overdue progress in a global drive to regulate the financial sector in the European Union and United States, but the acid test for policymakers will be agreeing global bank capital rules.

The U.S. Senate will cast its first votes on Tuesday on a sweeping bill to reform Wall Street. EU lawmakers start voting next week to regulate hedge funds and revamp oversight, with draft rules to shine a light on derivatives due in June.

The votes come as the financial crisis nears its third anniversary with few actual changes approved so far, raising concern that the appetite for reform may be waning.

“As markets recover and as economies seem to recover, there is a little bit of concern in making sure we maintain the momentum for reform,” Greg Tanzer, secretary general of the International Association of Securities Commissions, told Reuters last week.

The G20 group of leading countries pledged last year to regulate hedge funds and derivatives, reform financial supervision and accountancy and impose tougher capital rules on banks through the Basel Committee package by the end of 2012.

“Although some very good progress has been made, some of that is still at the stage of developing the reform proposals rather than fully implementing them. The concern is that a reform weariness takes over and we lose a bit of momentum,” Tanzer said.

BASEL ACID TEST

Analysts say the acid test for global reform will be to agree the new Basel bank capital and liquidity rules by the end of this year for 2012 implementation.

There are already signs that some fatigue may be creeping into this process and more G20 compromises will be needed to push it through.

Banks want a delay in new bank trading book capital rules due next January as well as in the broader capital and liquidity reform, saying they cannot raise huge amounts of fresh capital and at the same time keep lending to aid recovery.

Basel Committee Secretary General, Stefan Walter, said there was no talk among committee members of a delay to trading book rules and that the main package will be completed on time.

G20 leaders meet in Canada next month and in South Korea in November and will be under pressure to show real progress but compromises on the timing and content of Basel are inevitable to reach a final deal, experts say.

Asian countries like Japan see the financial crisis as a North Atlantic rather than global problem and want more leeway, while France and Germany have qualms over introducing all the Basel proposals, said Graham Bishop, an EU financial services expert.

“I think 2012 is looking a bit optimistic,” Bishop said.

Countries are beginning to think more deeply why reforms are being adopted in the first place which may slow the pace of change, said Richard Reid, director of research at the International Centre for Financial Regulation.

“The test for the G20 will be to agree high-level principles but leave wiggle room for individual countries and their needs,” Reid said.

G20 FINE TUNING

The G20 and its offshoot, the Financial Stability Board, are meant to ensure a coordinated response to reforming rules but differences between countries leave banks worried they could be at a competitive disadvantage to rivals in other countries.

It’s not just over Basel that views differ.

Differences are emerging over how the EU and United States are implementing pledges they made at the G20, leaving Asia and Latin American members of the group as bystanders.

Divergences over EU and U.S. derivatives reforms worry banks in the global market. Attempts to create a single set of global accounting rules face delay as the EU and United States differ over how to price assets.

EU plans to regulate hedge funds have also drawn accusations of protectionism from the United States.

“If we don’t have that global cooperation we run the risk of every jurisdiction doing different things,” said Mark Austen, acting chief executive of the Association for Financial Markets in Europe.

A truly level global playing field is a pipedream anyway, said Nicolas Veron of Brussels think tank Bruegel.

“There is a legitimate question over which divergences are harmful and which are not,” Veron said.

“The notion that everyone should do exactly the same thing at the same time is not realistic. We need a much finer appreciation at the G20 level on what has to be done jointly or not,” Veron added.

((Reporting by Huw Jones, editing by Stephen Nisbet) ((huw.jones@thomsonreuters.com; + 44 207 542 3326))

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