24 August 2012

Reuters: Europe's big bang for bank rules set to sputter

A hoped-for "big bang" start next year for new rules to make banks safer is set to sputter in Europe, creating more uncertainty in a sector struggling to win back investor confidence lost in the financial crisis.

Basel III, the core reform of global banking rules hammered out following the 2007-2009 financial meltdown, starts on January 1, with some elements phased in over six years. Delays in turning it into European law means banks and regulators face a piecemeal introduction that widens the scope for confusion, while nervous markets are forcing banks to comply quickly even before some of the rules are finalised.

Europe had hoped to approve its law for implementing Basel III by July, giving regulators enough time to flesh out about 40 additional technical rules to implement it in time for the January 1 start. It will now be at least October before the law is ready, due to delays such as the European Parliament wanting to insert new elements like capping bonuses of bankers at a level no higher than their fixed salaries.

Germany this week moved to push ahead with national implementation of Basel, with Finance Minister Wolfgang Schäuble saying he hoped other Europeans would share "this sense of urgency".

Basel III is the regulators' response to the financial crisis that showed banks held too little capital to withstand market shocks, leaving many of them to be rescued by taxpayers. The rules will force banks to hold core capital of 7 per cent by January 2019, roughly triple the amount currently required. Rules governing banks' liquidity and leverage or debt positions will be phased in.

The European Banking Authority (EBA) is fleshing out the EU law but has already been forced to delay some of the new reporting requirements by a year to January 2014. Britain's Financial Services Authority has taken a similar step.

Banking supervisors agree not all the new rules will be ready by January, but insist they will use existing powers to require banks to report on liquidity and leverage from day one. Supervisors say banks will also have to start using the much tougher definition of what can be included in core capital buffers.

But banks say they won't be ready for Basel's hefty new credit value adjustment (CVA) capital charge to cover the possibility of derivatives customers going bust. Some regulatory officials say a European delay in the CVA charge is all but inevitable even if this triggers US complaints. The Basel Committee of central bankers has already criticised Europe for diverging from parts of their accord.

Banking supervisors have signalled they are willing to use discretion given the tight timetable, but that may end up creating more uncertainty for banks and investors. Supervisors say they would prefer to acknowledge the delays formally and set later dates for the parts of the Basel III that won't be ready by January. This is essential, they say, to avoid the danger of leaving markets, banks and investors confused at a time when there is already deep suspicion about bank safety due to the eurozone debt crisis.

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