Michael Shashoua: Basel III’s Fault Lines

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, says 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.

Not many major markets have published final rules for implementing Basel III yet. Those that have include Australia, China, India, Japan, Saudi Arabia, Singapore and Switzerland. Those that haven’t, however, include Argentina, Belgium, Brazil, Canada, France, Germany, Hong Kong, Indonesia, Italy, Korea, Luxembourg, Mexico, the Netherlands, Russia, South Africa, Spain, Sweden, Turkey, the UK, the US, and the EU as a whole. Turkey and Argentina have not yet even published draft regulations for Basel III.

Reluctance
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 says. Ventura adds that it’s “unlikely that the global community will rally around the cause to make it a priority anytime soon.”

The flaws of Basel III itself are most evident in its “one size fits all” approach to capital holdings, O’Shea says. “They don’t understand the effect on liquidity that will have if it forces people to hold liquidity buffers,” she says, explaining that this means holding greater amounts of collateral to support clearing operations, which will have to be taken from asset pools and liquidity that firms would prefer to use elsewhere. “This could end up driving people out of business.”

Since Basel II took many years to gain acceptance, it wouldn’t be surprising if Basel III took an equal amount of time. The Committee chairman’s exhortation to markets to make the deadline may itself lack teeth since he admitted in nearly the same breath that not all jurisdictions may be ready. But the real question is whether the delay will produce rules that are done right or congeal the rulemaking momentum.