Banks Left in Quandary Over Basel III

Terry Flanagan

Concerns are growing over the impending Basel III rules, which are designed to harden the defenses of banks against a repeat of the global financial crisis, as many of the countries that signed up to the requirements are not likely to be in a position to impose the new standards.

The Basel III measures are being phased in from January 2013 with full implementation from 2019, but a report earlier this week from the Basel Committee on Banking Supervision, a group of central bank governors from the world’s leading economic nations, who produced the Basel III document in late 2009, says that only seven of its 28 member countries—Japan, Australia, China, India, Saudi Arabia, Singapore and Switzerland— have so far made the rules, which were agreed upon in 2010, legally binding.

“it is clear that not all jurisdictions will be ready in time,” said Stefan Ingves, chairman of the Basel Committee and governor of Sweden’s central bank.

“Further work is needed by some jurisdictions to close the gaps identified in their draft regulations. It is essential that all jurisdictions continue to press ahead and finalize regulations by the deadline or as soon as possible thereafter.”

The European Union and the U.S., for instance, are both still at the drafting stage. Disputes among the member states are holding up progress in the EU as some nations have been accused of trying to water down the rules. Maybe stung by the Basel Committee’s report, the EU’s financial services commissioner, Michel Barnier, yesterday proclaimed that the EU was “in the home stretch” in terms of narrowing in on a deal for Basel III.

The Basel III rules were formulated largely in response to the credit crisis, with banks required to maintain proper leverage ratios and meet certain capital requirements. The rules, which governments around the world must start to implement from the beginning of next year, require all banks to strengthen their capital reserves by raising total core reserves to 7% from current levels of 2%.

Germany, for instance, in August agreed to push ahead with the adoption of stricter Basel III rules and urged others in Europe to follow their lead. While Andrew Haldane, a leading official at the Bank of England, recently complained that the Basel III rules were, in fact, too complicated.

All of this is leaving banks, especially in Europe, in some kind of limbo.

“Views of politicians and the banking sector with regards to the new rules appear to be on an ever-divergent path,” said Phil Lynch, president and chief executive of Asset Control, a U.S.-based data management solutions company, in his recent blog.

“However, banks have clear misgivings around the rules, citing some key unintended consequences, especially in the shipping and aircraft financing sectors.

“The Bank of England’s Haldane has even gone as far as to suggest that Basel III has become too complicated to be effective. He suggested a move back to the drawing board to design a more minimalist approach. In reality, this type of U-turn is not something we are used to seeing from the regulatory community.

“Therefore, despite their disquiet, banks must begin preparations in earnest to ensure they are not caught off guard. A wait and see approach will not do.

“While Haldane’s suggestion that ‘less is more’ might curry favor with the banking community, the same cannot be said for financial institutions’ approach to compliance in light of the myriad of new regulations they face.

“Effective and efficient data management sits at the heart of this and without the right infrastructure in place, banks will struggle to deal with the increased regulatory scrutiny resulting from, but by no means limited to, Basel III.

“Meeting the new requirements head on with accurate, accessible and actionable information is the only way to instill confidence in analysis and decision-making which underpins compliance, not least with Basel III.”

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