Basel Committee Holds Firm in Face of EU Threats

WASHINGTON — The Basel Committee will move forward with its final regulatory capital rules by yearend despite threats from the European Union that its members may choose to ignore the standards out of fear that they might stifle growth.

William Coen, secretary general of the Basel Committee on Banking Supervision, said in a speech to the Institute of International Finance Friday afternoon that the committee will finalize several outstanding portions of the Basel III accords soon.

The objective of those rules is to reduce the high degree of variability in assessment of risk-based capital standards between countries, Coen said, and while the goal of the exercise is not to raise capital requirements, banks that find themselves undercapitalized under the new standard may have to make adjustments in order to comply.

"The committee's objective is to restore the credibility of the risk-based capital framework, which is an integral element of the committee's post-crisis reforms," Coen said. "This is not an exercise in increasing regulatory capital requirements, although I do not rule this out as a possible outcome for outlier banks."

Coen went on to say that the committee is continuing its work on other final elements of the Basel Accords as well. The committee is considering "refinements" to its operational and market risk standards, and is "still assessing … various combinations of approaches" to limiting the permitted uses of internal ratings-based approaches to risk-based capital allocation, he said.

An ongoing quantitative impact study — which is intended to examine the cumulative effect of the Basel-mandated reforms — is progressing, Coen said, but is hampered in part because the exercises upon which the study are based "often require data that are not readily accessible," leaving banks to have to make their best guesses based on what data is available.

"In short, QIS exercises are a labor-intensive, painstaking process for banks and for bank supervisors but an essential part of our policy development process," Coen said.

Last week European Commission Vice President Vladis Dombrovskis told a banking conference in Brussels that the federation would not abide by certain final Basel rules, arguing that the direction the committee is moving in would require grater capital for member countries' banks. Such a requirement would further stifle growth, Dombrovskis said.

"At a time when we are focused on supporting investment, we want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe's banking sector," Dombrovskis said.

While not addressing those concerns head-on, Coen's update showed that the committee was not backing down on its rules — sometimes referred to colloquially as Basel IV.

That position could lead to a more formal breakdown of the post-crisis push for global harmony in financial regulation — a breakdown that has been long coming but grown more glaring as the U.S. pushes for ever more stringent capital requirements for it biggest banks while other countries like Europe and Japan embrace a less onerous approach.