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Carney under pressure as battle for Basel III rages

Financial protectionism and US intransigence blight the Basel III drive, testing the mettle of Basel’s chief cheerleaders, Bank of England governor-designate Mark Carney and Swedish central bank governor Stefan Ingves. The post-Lehman bid to craft harmonized global banking standards is under severe strain amid a global policy rift and fierce lobbying.

Global policymakers are understandably putting on a brave face when touting progress made in implementing the Basel III accord, even after the US announced earlier this year it would postpone the January 2013 start date, triggering the ire of EU banks and calls for a tit-for-tat delay.

“[Nearly] 90% of the US financial system is on a path to Basel III,” Mark Carney, Bank of Canada governor, and chairman of the Financial Stability Board (FSB) at Basel, said on December 11 in a speech to the Toronto CFA Society. “So the facts on the ground are that the core of the US banking system has built...around $300 billion of capital. It is being stress-tested back to Basel III norms, and so the core – not just the core but 90% of the US financial system – is on a path to Basel III."

 Ingves (L) & Carney; Source: Reuters

Criticism of the US snub in November, particularly from Germany, came thick and fast, amid fears that the global playing field for banks, rather than evening up, would now be tilted in the US’s favour. Despite four years of ground-breaking global cooperation, tougher supervisory codes, G20 summits and market pressures for reform, reform aficionados fear that while the EU will legally apply Basel norms on all banks, the US will back-slide on reforms, as was the case with the Basel II framework. As one European bank CEO told Euromoney: "What is the justification for delaying Basel III in the US ... that Dodd-Frankis tougher? That’s bullshit. Dodd-Frank is in limbo. Is the US postponing Basel III or is it simply not going to comply? We’ve got to stop being so naive in Europe, where we’re already on track to do it.”

Even though the Basel III draft proposals were first circulated in 2009, US policymakers in recent months have unleashed an avalanche of letters to US banking and capital markets agencies, demanding greater clarity on its projected impact, bolstered by the powerful anti-Basel brigade, spearheaded by Thomas Hoenig, a board member of the Federal Deposit Insurance Corporation. What’s more, US financial players have carpet-bombed the Federal Reserve with some 1,100 comment letters on the international framework, with calls for a lengthier transition process, a delay in the adoption of standardized risk weightings, and warnings from banks such as JP Morgan that US banks will be placed at a competitive disadvantage to their international peers.

At the heart of these concerns lies the fear that US banks will face a decline in their capital levels, or a jump in their volatility, given Basel’s treatment of cashflow hedges, deduction of mortgage-servicing assets, and the mark-to-market valuation of certain investment securities in the calculation of regulatory capital.

Reform battle

However, for Stefan Ingves, the anti-Basel talk is full of hot air. In a December interview with Euromoney magazine, he said: "There is nothing new under the sun. There is always an element of give and take when attempting to establish a consensus because countries have different views about what is important to their financial systems. But the Basel III agreement is what it is and the committee is now dealing with technical details."


In the US, however, the Dodd-Frank Act, as proposed, contains several provisions that are seemingly inconsistent with the Basel framework, including tougher restrictions on capital instruments that can qualify as regulatory capital, and the Collins Amendment that bars some banks from having internal ratings below given general risk-based thresholds.

However, asked how Basel should respond to the challenge of competing regulatory agendas in the US and Europe, Ingves pointedly softens Basel’s mission in nurturing a global level playing field for banks and instead emphasizes core capitalization aims. "What really mattered in Basel III was that capital would go up, substantially, and also in terms of the quality of the capital," he said. "The core of this is common equity tier 1 and we have made substantial progress compared with the way things were, and this move is not dependent on the respective structure of domestic banking systems."

Fears are growing that policymakers will pay lip service to Basel reform, which, in addition to calling for capital hikes, mandate international benchmarks on the composition and definition of banks’ capital, liquidity and counterparty credit risk, counter-cyclical buffers to enhanced supervisory measures and sanctions for non-compliance, in a bid to create a global level playing field of sorts for banks.

For global reform aficionados, Ingves's Realpolitik is far from reassuring – and throws into sharp relief the risk that the anti-Basel bandwagon appears to have already succeeded in sowing the seeds of mistrust between banks and global policymakers, raising the risk of banks back-pedalling on reforms.

Credit Suisse chairman Urs Rohner said earlier this year: "There is a risk of non-harmonized regulation and unnecessary complexity given the re-fragmentation of regulation into domestic markets. This creates layers of conflict, it’s costly and more risky given the operational risk [associated with competing, rather than harmonized standards]."

The recent US decision to impose higher capital and liquidity requirements on overseas banks in the USand the push by some EU national supervisors to restrict the fungibility of capitalcross-borders add to balkanization fears, an affront to Basel's ethos to consolidate the global banking system.

The anti-Basel sentiment and rising tide of financial protectionism comes at an inopportune time, as Ingves and Carney push to intensify reform on what was supposed to be a technical, rather than an existential, level: overseeing the push for a greater harmonization of risk-weightings for bank assets while fleshing out the highly controversial liquidity coverage ratio, the definition and size of the leverage ratio, as well as reviews of the trading book and securitization rules.

Carney, who will take over as Bank of England governor in July, will face a huge challenge in battling the UK’s triple-dip recession and crafting a new monetary consensus while fending off Basel attacks.