Global policymakers insist that the Federal Reserve’s failure to implement new banking rules on time is nothing to worry about, but critics of the international plan to strengthen the financial system say this is evidence it’s falling apart.
In response to the financial crisis, the Fed and central banks in 27 other nations agreed to implement a global accord known as Basel III that would require banks to hold more cash to protect against bad loans, limiting the amount of money they could invest. The rules are scheduled to phase in gradually between 2013 and 2019, but many stand to miss the first deadline at the beginning of next year.
The Basel Committee on Banking Supervision, a Switzerland-based group of national regulators that originally negotiated the tighter banking requirements, announced Friday that just 11 of the 28 member countries are ready to implement the new rules on Jan. 1. The U.S. and European Union are among the most important players that are behind schedule.
But regulators aren’t panicking.
“We’re comfortable with what’s going on,” said Stephen Cecchetti, chief economist at the Bank for International Settlements, which contains the Basel Committee. “There are many of them that are already finished, some of them that are going a tiny bit slower, but all of them are committed.”
Basel III, which would triple the capital banks are required to hold to 7 percent, will use tools such as a leverage ratio and liquidity ratio to measure banks’ progress.
In the long run, banking regulators are still “on pace” to meet the requirements, Mr. Cecchetti argued.
“Short delays measured in months of implementation of the standards seem to be not terribly important,” Mr. Cecchetti said.
Dick Bove, a bank analyst at Rochdale Securities, says the sluggish pace among so many participating countries is not surprising, considering that he thinks the global accord will fold eventually.
“I, personally, think Basel III will fail,” Mr. Bove said. “I believe the reason for the Fed’s delay is directly associated with the probability that Basel III will never go into effect.”
Some critics question whether the new regulations would slow the global economy, but the Bank for International Settlements points to a study that shows Basel III would have little impact on the banking system.
“Overall, the economic impact assessment suggests that even a significant increase in capital in banks would have only a very small, minimal impact on growth and inflation,” Mr. Cecchetti said.
In fact, most banks are in “good shape” and are already prepared for Basel III, he added.
“In the case of many banks, they already meet the 2019 standards, so they don’t have to do anything,” he explained. “This is not an issue.”
The bigger problem is enforcement consistency.
Chris Brummer, a global finance professor at Georgetown University Law School and fellow at the Atlantic Council, explained that Basel III is a “soft law,” which makes it more of an informal agreement.
Critics of Basel III fear this lends it to being applied inconsistently among countries, which would create an unlevel playing field for global banks. Not only would having different start dates affect competition, but it also would be influenced by the way in which the regulators interpret the rules for their individual banks.
So far, the countries that are prepared to implement Basel III on time include Australia, Canada, China, Hong Kong SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland.
But the majority plan to miss the dealing. The United States, several European Union nations, Argentina, Brazil, Indonesia, Korea, Russia, and Turkey are all behind schedule.
“There is a risk of non-harmonized regulation and unnecessary complexity,” said Credit Suisse Chairman Urs Rohner, whose Zurich-based bank is facing stricter Swiss banking regulations than those of the rest of Europe. “This creates layers of conflict; it’s costly and more risky.”
Mr. Bove said the Fed is waiting to see what European regulators do. The Fed doesn’t want to put U.S. banks at a disadvantage by imposing rules here that won’t be enforced elsewhere, but the Europeans have made the same complaints about the United States.
The European Union and the European Parliament failed Thursday to reach an agreement at a meeting in Strasbourg, France. Negotiators are arguing over leverage limits and liquidity ratios, but they did make progress on a preliminary deal to cap bankers’ bonuses at nothing higher than their salary.
The two sides will go at it again on Tuesday, according to reports, and are looking to start implementing the rules in January 2014.
Back in the United States, Senate Republicans are giving the Fed a yellow light.
“If the Fed is giving itself more time, let’s hope they use it well,” a Republican Senate aide said on background. “If it turns out that the Fed took the time here and got our capital standards right, it’s worth the time. If they take the time and play politics, then the time will be wasted.”
Senate Republicans want evidence that Basel III would actually raise the level of capital banks hold. Sen. Richard C. Shelby, Alabama Republican, is skeptical about this because when Basel II was introduced in 2004, it rewrote the rules in a way that actually allowed banks to lower their capital in the years leading up to the banking crisis.
“The regulators are saying that Basel III will be an improvement, but we’re just not sure because we haven’t seen any studies to back it up,” the Senate aide said. “So far, the regulators have not provided us with enough data to determine whether or not Basel III will sufficiently increase the quality and quantity of capital that banks are required to hold.”