Demanding Basel III Clarity

The US authorities' decision earlier this week not to enforce a January 1 deadline for compliance with Basel III capital adequacy requirements is not surprising, considering the Basel Committee on Banking Supervision's announcement that its provisions will stretch out in phases over several years through 2019.

The postponement shouldn't affect the Basel Committee's phased approach to implementing the regulation, according to Alok Sinha, head of the banking and securities practice at Deloitte.

Similarly, pushback from small US community banks and their lobbies shouldn't derail large US-based firms from preparing and implementing their Basel III compliance efforts. The timeline's length running through 2019, over six years from now, is somewhat deceptive. Phasing in of new deductions begins in 2014 and higher equity ratios for Tier 1 firms begin right away at the start of 2013 and rise further in 2014.

Those will be followed by more thresholds that must be met in 2015 and 2016. 2019 really is only the remaining phase-out of ineligible capital instruments. So larger Tier 1 firms, whether in the US, Europe or other regions, would be wise to start now in preparing to meet the Basel III standards.

"Institutions themselves don't feel they have a choice," says Sinha. "Most accept the fact that they have to comply."

There is still another outstanding question for an intermediate step in the process, however. The Basel Committee still has to finalize Basel III rules concerning the liquidity coverage ratio requirement, set to take effect in 2015, committee chairman Stefan Ingves said in an address in Panama City on November 15. The committee expects to resolve those rules in December, according to Ingves, but also has more work to do with reviews of trading book and securitization rules under Basel III, as well as improving standardization of credit and operational risk approaches.

Even if large US firms are ready and willing to comply with Basel III provisions, the committee drafting these rules will have to complete its work and fill in these blanks to inspire more confidence on its home territory before it can hope to get other regions to cooperate.