Basel Bank Group Attacks EU, U.S. for Capital Rules Lapses

The U.S. and European Union 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 found weaknesses in the U.S. and EU draft implementing measures for the so-called Basel III standards, the Basel Committee on Banking Supervision said today in a statement on its website.

“There is now a window of opportunity for the gaps identified to be closed,” Stefan Ingves, the Basel group’s chairman, said in the statement. A related review found Japan’s rule-making to be compliant with Basel III, Ingves said.

The largest global banks would have needed an extra 374.1 billion euros ($482.4 billion) in their core reserves to meet Basel III had the standards been enforced at the end of 2011, according to data published by the committee last month. Nearly 200 billion euros of the collective shortfall was at banks in the 27-nation EU.

Michel Barnier, the EU’s financial services chief, said that he has “reservations” about some of the Basel group’s findings, “which do not appear to be supported by rigorous evidence and a well-defined methodology.”

There is a “lack of consistency” in how different jurisdictions have been reviewed, Barnier said in an e-mailed statement.

January Deadline

Lawmakers are struggling to meet a January 2013 deadline set by the Basel committee for implementing new standards, 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.

Barnier’s response “looks like sour grapes,” said Bob Penn, financial-regulation partner at Allen & Overy LLP in London.

The European Commission’s defense seems to be that in practice the banks will be regulated in a way that’s consistent with Basel III, “regardless of what the rules say,” Penn said in an e-mail.

Ingves, who is also governor of Sweden’s central bank, announced last year that the Basel committee would organize peer review teams to assess how well authorities and banks comply with Basel III.

Core Capital

For the EU, the peer review said that the bloc’s draft rules on what counts as core capital are insufficiently detailed and robust. The review also cited concerns that capital rules for so-called bancassurers, lenders with insurance arms, wouldn’t be as tough as the Basel standards.

“The team is concerned that internationally active EU banks could take advantage of the modified rules,” according to the report. “This potentially has material impact both in terms of financial stability and an international level playing field.”

Barnier said that “extensive information and clarifications” provided to the Basel committee by EU regulators had “only been partly reflected” in the report.

The commission is confident that future reports “will constitute an improvement,” Barnier said.

Extra Requirements

Still, the Basel group refrained from criticizing EU plans to limit the ability of national regulators to impose extra requirements on top of Basel III. Ingves last month said that this so-called maximum harmonization approach wasn’t logical.’

“It’s quite worrying to see this level of bickering in public between two key players in the field of international financial regulation,” said Richard Reid, research director for the International Centre for Financial Regulation in London.

“Such signs of an ongoing blame-game somewhat flies in the face of the image of the international regulatory community moving forward in concert,” Reid said in an e-mail.

Possible concerns over U.S. implementation of Basel III include a provision in the nation’s Dodd-Frank law stating credit ratings mustn’t be used to set bank capital requirements.

Alternatives proposed by regulators may be less strict, especially on the reserves that lenders must hold against possible losses on securitized debt, according to the report.

Federal Reserve

“The U.S. approach for securitizations is judged materially non-compliant with the Basel framework,” according to the report.

U.S. regulators represented on the Basel committee include the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp.

Today’s report found that the draft U.S. rules “significantly complied with the international pacts,” Barbara Hagenbaugh, a Federal Reserve spokeswoman, said by phone.

“The Federal Reserve strongly supports the Basel review’s aim to ensure the agreements are implemented in a similar manner worldwide,” Hagenbaugh said.

Japan, which has put in place rules ahead of the 2013 Basel deadline, was judged by the group to be in line with the international standards.

While some of its requirements varied technically from Basel III, for example on the capital that lenders must hold against assets they intend to sell before maturity, these differences don’t have a “material” impact, according to the report.

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 meeting in November.

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

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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