International Monetary Fund Managing Director Christine Lagarde said that delays in implementing Basel III capital rules in some countries risk diluting standards and hurting economies.
“We are, however, worried about uneven implementation of these rules, particularly the delay of Basel III in major jurisdictions,” Lagarde said in a speech in Frankfurt today. “Different rates of implementation could contribute to dilution of overall minimum standards. These delays affect longer term business decisions, straining credit markets and spilling over to the real economy.”
Global regulators have clashed with lenders over the severity of the capital and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation in the wake of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. The measures, known as Basel III, will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk.
“The IMF is also worried about national differences in the calculation of the riskiness of assets -- the very basis for determining the capital needs of all banks, and the success of the new rules,” Lagarde said. “In an interconnected world, the lowest common denominator is connected to all.”
Lagarde noted some “historic achievements” on global regulation and said that agreements in Europe have eroded risks to financial stability. Progress is still uneven, which risks undoing that work, she said.
“The pace of implementation has been adjusted intentionally to support banks on the mend, but delays also reflect difficulties in agreeing on the way forward, and pushback from industry averse to changing outmoded and dangerous business models,” she said.
The international bank rules have been beset by delays as regulators ponder how best to implement the measures. The European Union, like the U.S., missed the start-of-the-year deadline to begin applying parts of the Basel III package. EU Financial Services Commissioner Michel Barnier is weighing a Jan. 1, 2014, date for the gradual phase-in of the rules.
Lagarde also addressed the issue of too-big-to fail banks, saying that they enjoy an “unacceptable” implicit subsidy of about 0.8 percentage points in lower borrowing costs. The variation in national solutions to this is also a challenge to global regulation, she said.
“Pressure to address the moral hazard from this problem and facilitate resolution has fostered the development of regional initiatives to legislate banking activities or ring-fence operations, such as the Liikanen, Vickers and Volcker proposals, and the soon-to-be legislated German and French reforms,” she said. “While well-intentioned, these separate plans could undermine common goals of harmonizing global standards if they are not well coordinated.”
Lagarde said that European policy makers need to “plow ahead” with banking union and ensure that the measures they take comply with global rules such as Basel III. They must also ensure the supervisory arm of the European Central Bank gets enough resources and authority, with a “coherent, credible backstop,” she said.