Basel Faulty

EU must ensure Basel-III is delayed not derailed

Europeans need to hold their nerves on Basel III. Brussels is preparing to follow the lead of the US regulator and delay the formal implementation of global banking reforms, which is due to go ahead in January. It should make sure the delay is short.

A late introduction of Capital Requirements Directive IV, as the European interpretation of Basel III is known, would not come as a surprise. The so-called “trialogue” between the European Commission, the European Parliament and member state governments still hasn’t thrashed out compromises over fundamental issues like the definition of liquid assets or bankers’ compensation. Unless they can nail things down in the next few weeks, hitting the initial deadline looks impossible.

If Brussels were to commit formally to a short but realistic delay — say, no more than six months — it could avoid throwing the process off track. The consensus remains that tough global reforms are needed. Asian economies such as Singapore and Hong Kong should make the Jan. 1 deadline for Basel III, while Japan could do so by March. And the United States may only wait for months rather than years, even though Europeans fear that only the major American banks will be affected.

The danger is that the hiatus could undermine the whole process. Banks are pushing for delays, pointing out that they are being asked to finance the economy to avoid recession. Meanwhile, economists like the Bank of England’s Andrew Haldane have pointed to the shortcomings of regulatory systems that rely on risk-weighting bank assets, and are too complex - such as Basel III. These kind of concerns could mean that Solvency II — a kind of Basel III for insurers — gets delayed for two years.

Luckily, there are countervailing forces. One is that the market is way ahead of any trialogue: investors now expect banks to hold high, 10 per cent core Tier 1 ratios on a Basel III basis, regardless of the supposed 2018 compliance date. Another factor is the appointment of Mark Carney, chairman of the Financial Stability Board of global regulators and a Basel III enthusiast, as the new Band of England governor. That should help make Europe’s delay a small hiccup, rather than a major tipping point.