Slow train to Basel

Basel reforms: Amid the furious debate about global banking reform, it is easy to forget that regulators have so far agreed only one meaningful change to bank capital. That modification, which affects capital backing for trading assets, was due to take effect early next year. But late on June 18, the Basel Committee on Banking Supervision said implementation was being pushed back to the end of 2011. Banks are also getting a two-year transition period for some trading books. The danger is that broader reform efforts will be blown off course too.

The new trading-book rules aim to address one of the most glaring loopholes in the previous framework. Previously, banks could hold debt securities while setting aside very little capital because regulators believed that these could be sold more easily than loans. The result was a massive arbitrage in the banking system. When the market for asset-backed securities seized up in August 2007, banks like UBS, Citigroup and Merrill Lynch were saddled with tens of billions of dollars of debt they could not sell, and which had almost no capital backing.

The new rules will increase the capital charge for most complex debt securities by a factor of three or four. Even so, most regulators regard this as little more than a sticking plaster and want tougher action. Nevertheless, when the US and the European Union agreed to delay trading book reform last month, the Basel Committee had little choice but to follow suit. This does not bode well for future financial reform. Basel is studying a more comprehensive set of changes to bank capital and liquidity, with new rules slated for the end of 2012. Few expect that deadline to be met. Banks are already warning of the dangers to economic growth if the rules are introduced too soon. Politicians appear to be listening.

But delaying reform also carries risks. As the banking crisis fades and is replaced by other woes, the temptation to fudge difficult decisions grows greater. Basel’s shift means that the first concrete change to global banking regulation will not take effect until after the fourth anniversary of the crisis. That is too long.