Bloomberg News

EU Criticized With U.S. for Bank Rules Weaker Than Basel III

June 11, 2012

The U.S., European Union and Japan may fail to fully implement bank-capital rules drawn up to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., global watchdogs warned.

International teams of regulators have found weaknesses in the nations’ implementing measures for the so-called Basel III standards, the Basel Committee on Banking Supervision said today in a statement on its website.

Preliminary assessments of the EU, the U.S. and Japan “have identified areas of divergence” with the Basel accord, the group said. There are “key areas where domestic implementation may be weaker than the globally-agreed standards.”

Nations face a January 2013 deadline set by the Basel committee for implementing the new rules, which more than triple the core capital that lenders must have to stave off insolvency, and require banks to build up buffers of easy-to-sell assets. The measures were published by the group in 2010.

The January 2013 deadline “is certainly challenging on an EU-wide basis,” Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee said in an e-mail. The Basel committee’s decision to review proposed liquidity rules for lenders shows that “taking a bit of time to get things right is better than rushing,” she said.

Full Effect

EU and U.S. regulators have said that they will be vigilant in policing how each party applies the Basel III standards, which are scheduled to take full effect in 2019.

Stefan Ingves, the Basel committee’s chairman, announced last year that the group would organize so-called peer review teams to assess how well authorities and banks comply with Basel III. The group’s decision to carry out these assessments followed the failure of the U.S. to apply a previous round of rules, known as Basel II, that was agreed on by the committee in 2004, and were scheduled to enter into force in 2007.

Today’s report sets out preliminary findings by the review teams, which plan further “on site” visits by the end of July, the group said.

For the EU, the findings include that the bloc risks watering down a ban on lenders counting their insurance arms’ reserves toward meeting their capital requirements.

Core Capital

The EU text is also less precise than Basel III in defining what kinds of securities can count towards core capital, the group said.

Michel Barnier, the 27-nation EU’s financial services chief, has said that Basel III should be “calibrated” to adapt it to the bloc’s banking system. Stefaan De Rynck, a spokesman for Barnier, couldn’t be reached for comment today.

For the U.S., potential concerns include that the nation’s regulators may apply the rules to too few banks (EUGNEMUQ:US), the group said.

Also, U.S. plans to ban banks from relying on assessments by credit-ratings companies to calculate their capital requirements may also hamper compliance with Basel III, the group said.

“What gives reason for concern is the fact that some countries have still not fully implemented Basel II,” Markus Heidinger, a partner dealing with financial regulation at law firm Wolf Theiss in Vienna said in an e-mail.

“When one takes into account the competitive effect of higher costs of increased regulation, it is to be expected that countries will closely watch each other’s implementation efforts,” he said.

Credit Booms

Issues flagged for Japan include that the nation has yet to publish rules, scheduled to apply from 2016, requiring banks to build up capital buffers during credit booms.

The Basel committee brings together bank regulators from 27 countries including the U.S., the U.K. and China.

Today’s report will be submitted to Group of 20 leaders at a summit on June 18-19. The document is based on information gathered up to May 31, the group said.

Proposals made last week by U.S. regulators for applying parts of Basel III to the country’s lenders are not taken into account in today’s report, the Basel group said.

Final reports on Basel III implementation in the EU, U.S and Japan are set to be published in September.

Less Capital

U.S bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said that flexible implementation of previous rounds of Basel rules in the EU has allowed European lenders to hold less capital against some assets than their U.S. counterparts.

The Basel group said last year that it would examine these alleged differences in how banks measure the risk of losses on their assets, with the aim of publishing preliminary findings by the end of 2012.

Initial examinations have shown that there is “substantial unexplained variation” in how banks carry out this so-called risk weighting on securities they intend to trade, the group said today.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Christopher Scinta at cscinta@bloomberg.net


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