Regulatory Reckoning

The Basel Committee on Banking Supervision's disclosure this past week that not all jurisdictions will be ready by January 2013 to implement Basel III rules or the Capital Requirements Directive (CRD) IV that frames these rules is not much of a surprise to those who follow the committee's efforts. The question now is whether the committee can make the right kind of revisions to the Basel III rules to make it acceptable in enough European countries or worldwide and still retain the necessary teeth to make the rules effective.

The worldwide will to impose stricter capital adequacy requirements is weak, considering the raft of other economic problems, as Ed Ventura, president of consultancy Ventura Management Associates, observes. There's the eurozone crisis, slowing global growth, high unemployment, and the nearing US presidential election, which freezes further regulatory action in the US. "The legislative priorities of the jurisdictions that will be impacted by Basel III are more consumed with resolving some of those issues than with generating rules to enable Basel III," says Ventura.

Delaying Basel III could even boost the global economy by holding off additional restrictions to capital flows, notes Ventura. "Increased capital requirements will further restrict lending to small business and to individuals, which will further slow growth," he says. Slower growth exacerbates unemployment and reduces tax revenues in all jurisdictions. In addition, Basel III imposes greater requirements on foreign exchange, specifically liquidity rules that hadn't previously existed in that market, notes Virginie O'Shea, senior analyst at consultancy Aite Group. "What impact will that have, when we're suffering through such a terrible climate economically?" she asks.

Different European nations' regulators and public officials have been reluctant to back Basel III out of concern that it will damage their local banking industries, according to O'Shea. So these nations, and Europe as a whole, have insisted on reviewing the details of Basel III before assenting, she adds.

Since Basel II took many years to gain acceptance, it wouldn't be surprising if Basel III took an equal amount of time. The question is whether the time will produce rules that are done right or congeal the rulemaking momentum.

One other regulatory note – something Inside Reference Data will be watching next week: The Financial Stability Board will be considering those legal entity identifier (LEI) operations proposals submitted back in September, at meetings in Basel on October 15 and 16. Will these meetings yield more specifics on procedures for LEI implementation?