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International regulators have agreed to keep a proposed capital surcharge on the world's most systemically important firms despite concern among institutions that the extra fee will be excessive and crimp lending.
September 28 -
Bankers, directly and through their lobbyists, have been expressing outrage related to the Basel III rules designed to ensure the safety and soundness of the global banking system. A top spokesman at the American Bankers Association, for example, was recently quoted saying that Basel III should be "put on a shelf."
September 27 -
While bankers complain about what's already on the books, regulators are moving on to write new "macro-prudential" rules designed to curb systemic risk.
September 26 -
Executives tell symposium audience that Basel committee's surcharge on systemically important firms will impede economic growth.
September 19
WASHINGTON — Years ahead of when it is due to be implemented, it's already clear that the Basel III accord will be plagued by serious trust issues.
The Basel Committee on Banking Supervision announced last week that it will set up a framework to oversee each member country's implementation of the capital and liquidity accord. Importantly, the committee said it will release its results publicly and update them on a regular basis so it's clear which nations are falling behind.
The agreement was significant for several reasons, including marking the first concrete effort by international regulators to ensure that competitive disparities don't develop based on how far along member countries are in implementing Basel III.
But it was also viewed as a slap in the face for the U.S., which failed to fully implement the Basel II accord, and a sign of general distrust among member nations.
"On the one hand it's a positive that regulators seem to recognize this in advance, but it is also troubling that before the rules are even adopted there appears to be some worry that everyone will implement it in a fair and consistent way," said Jaret Seiberg, a financial services analyst at MF Global Washington Research Group.
On both sides of the Atlantic Ocean, there's been strong skepticism over whether the rules will be implemented in a parallel fashion.
U.S. regulators, for their part, have already questioned whether Europe will apply all of the requirements of the new accord, while European lawmakers are doubtful the U.S. will follow the new rules at all, given its dismissal of Basel II.
"Both sides have reason for concern," said Seiberg. "The U.S. has yet to implement Basel II while the rest of the world is already there. There is concern on the flip side the U.S. has always been tougher in its interpretation of Basel."
Some analysts agreed there are legitimate grounds for Europeans to distrust the U.S., especially when top bank executives, such as JPMorgan Chase & Co.'s Jamie Dimon, have said America should withdraw from the accord.
"There is continuing skepticism the U.S. is going to play ball," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. U.S. regulators, she says, have tried to reassure other nations by saying, "'We're going to do it. We're going to do it.' But then month-in, month-out, we don't. So the Europeans are very understandably saying, 'Says you.'"
But there are divisions even among other members of the Basel accord. In Europe, for example, the United Kingdom is pushing for the capital rules to be applied as stringently as possible, while other continental countries are pushing for a much more flexible approach.
"There is a framework to make sure one country is not gaming the rules and that the rules that get adopted get implemented equally," said Greg Lyons, a partner at Debevoise & Plimpton LLP. "But having said, the immediate concern is, 'Are they in fact going to be even implemented equally?'"
Regulators are proposing that all banks meet a minimum common equity ratio of 7% by 2019. Banks will have to hold at least 4.5% of common equity by 2015, and an added 2.5% conservation buffer that would go into effect gradually by 2019.
That would come in addition to a possible countercyclical buffer of up to 2.5% for banks to build up capital during good economic times; as well as capital surcharge in a range between 1% and 2.5% for the world's largest, most complex firms.
With so many moving parts, differences between how nations implement the rules are likely to develop.
"They very importantly recognized it's not just the rules in Basel, it's not just the rules that are adopted in the individual countries, but also how they are enforced," said Randall Kroszner, a former Fed governor and professor at the University of Chicago Booth School of Business. "These rules work best when it's consistent and robust application to the major countries. If some countries don't, if some countries only apply it in word, and not in deed, then that creates a challenge for the whole world system. Because obviously what we learned from the last financial crisis is the extent of interconnections between markets and countries."
Federal Reserve Board Gov. Daniel Tarullo has long been pushing the Basel panel to take steps to monitor each country's implementation process, or else lose the benefits of financial stability intended by the new set of standards.
In June, testifying before House Financial Services Committee, Tarullo stressed to lawmakers on the need for countries participating in the Basel accord to go beyond simple assurances of incorporating the new rules into their national regulations.
"It will be essential for international bodies of regulators to adopt effective oversight and monitoring mechanisms, in order to achieve the financial stability benefits that the minimum standards promise, to prevent the emergence of significant competitive disadvantages for internationally active firms, and promote international cooperation in addressing the technical and policy questions that will arise," Tarullo said.
Last month, Christine Lagarde, managing director of the International Monetary Fund and former finance minister for France, weighed in on the issue, pressing on the need for consistency to ensure a level playing field.
"There has to be a very strong commitment … to comply with the requirements whether it's in terms of capital, whether it's in terms of liquidity, and that's as far as the actors are concerned, as far as the framework is concerned," Lagarde told a Bretton Woods Committee's international council meeting while in Washington for annual global talks. "There has to be that consistency of work, so that the level playing field is very good and appropriate implementation can actually be delivered."
Some observers said the agreement this week was a natural outgrowth of such worries.
"There's always concern that it's the other guy that isn't going to enforce them as much you are enforcing them," said Kroszner.
Because of such growing fears, however, Lyons said it will be noteworthy if there is some effort on the part of the Group of 20 nations to reaffirm the need of a uniform approach when they meet in Cannes, France in November — as well as recommit to Basel III.
"What will be interesting to see, beyond the surcharge, if there is some effort by the G-20, to say, 'We're going to stick with Basel,'" said Lyons.
Even with such a framework and possible recommitment, it's unclear whether the proposed framework will have the power to enforce or whether countries may be penalized in some way by failing to comply as robustly as counterparts.
"At the end of the day, there's only the ability to persuade, nobody is going to have a trade war over whether something as arcane as capital rules are being implemented consistently," said Seiberg.
