Treasury’s Phillips pleads for caution on implementing Basel standards

A top Treasury official cautioned regulators against rushing to complete certain final aspects of the Basel III capital and liquidity standards, suggesting the agencies should take more time to ensure that the new standards are in line with existing rules.

Craig Phillips, who serves as counselor to Treasury Secretary Steven Mnuchin, said at a conference hosted by the International Swaps and Derivatives Association in Miami Thursday that so-called gold-plated capital standards — that is, standards that exceed the minimums set by the Basel Committee on Banking Supervision — “create challenges” for banks’ competitiveness in global markets.

Andrew Harrer/Bloomberg

While the Treasury supports foreign investment and global capital and liquidity rules, he said, some of the specific agreements are “miscalibrated.”

“The initial iteration of the fundamental review of the trading book and the Net Stable Funding Ratio — both Basel standards — were widely recognized as being miscalibrated,” Phillips said. “We do support their adoption in principle, but they have to be thoughtfully implemented on top of the capital and liquidity regimes that we have present here in the U.S.”

Phillps noted that the Treasury Department's June 2017 report on revamping the regulatory structure called for the U.S. to delay implementation of the NSFR and FRTB. The report said they should be delayed until “they can be appropriately recalibrated and assessed.” Phillips said the Basel Committee appeared to agree with the Treasury’s assessment when it included an implementation deadline of 2022 for its highly contentious capital floors standard in December.

Phillips’ comments come only days after Federal Reserve Gov. Lael Brainard said in a speech that the agency is “close to finalizing” the NSFR proposal that the agency published in April 2016. The rule would require banks to have stable funding for their baseline operations for one year.

The NSFR proposal would complement another Basel requirement, the Liquidity Coverage Ratio, which requires banks to hold enough high-quality liquid assets to maintain operations for 30 days. The proposal was issued jointly by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

Brainard said that rather than facing an additional burden, U.S. banks “are in a position to meet the expected requirements with little adjustment.”