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Did Regulators Make the Right Call on Basel III?

Over the weekend, global regulators elected to loosen key components of the Basel III liquidity rules.

Specifically, they relaxed the "liquidity coverage ratio," allowing banks to use less-traditional assets, including equities and high-rated mortgage-backed securities, to satisfy up to 15% of their requirements. They also delayed the revised rule’s full implementation to 2019.

Most news outlets were quick to classify the final rule as a big win for bankers, who have spent much of the last two years arguing that Basel III requirements were, among other things, too complex and virtually impossible for a majority of financial institutions (community banks, specifically) to maintain.

Some pundits suggested that the easing could have a positive influence on both markets and the lending community.

“The revisions … should make the liquidity requirement less likely to deter financing of activity in the real economy,” according to the FT’s Lex column. “And they should sustain the buoyant demand for corporate bonds, and kick-start the securitization market.”

Others have argued that less stringent rules will do very little to bolster lending or, moreover, that any potential positive influence on the economy would be negated by the deeper implications the decision carries.

“The entire financial system is rendered riskier when all of the largest institutions are cajoled by regulators into adopting a similar view of asset risk,” CNBC senior editor John Carney wrote in a blog post.

“With every part of Basel III that is gutted, we are increasingly back where we were at the eve of the crisis,” Mayra Rodríguez Valladares, a managing principal at MRV Associates, wrote in a BankThink post earlier today. “In today's financial world, regulators pretend to supervise while banks pretend to be liquid.”

These sentiments, as alluded to in today’s Morning Scan, were shared by some members of the general public, who felt the easing was yet another example of regulators simply giving the big bad banks their way.

 “The self-serving deregulation … is nothing more than history already repeating itself and we’re not out of the mess from the last go round,” one Wall Street Journal reader commented. “No more ‘too big to fail’ ….that’s just semantics. They built it right back in.”

However, on the opposite side of the spectrum, there are those who think believe regulators have not adequately quelled the threat Basel III poses to community banks.

“Dangers still lurk in [Basel’s] implementation in the years to come,” writes John Berlau of the Competitive Enterprise Institute. “This is both because of the accord’s wrongheaded bias in favor of sovereign debt, and because U.S. regulators have rushed headlong to push it through before congressional action that is almost certainly needed to ratify any complex international agreement of this size.”

What’s your take on the recent changes to Basel III? Do the looser requirements adequately address the problems earlier versions were believed to pose for community banks? Or does the easing have deeper implications? Let us know in the comments section below.

Jeanine Skowronski is the deputy editor of BankThink. You can contact her at Jeanine.skowronski@sourcemedia.com or follow her at Twitter @JeanineSko.

Correction: John Berlau is with the Competitive Enterprise Intstitute. An earlier version of this post incorrectly associated Berlau with the Bastiat Institute.

Comments (5)
The provision of additional time is a sensible one, though it seems the extension given is rather long. However the redefinition of liquid assets seems a bit overly creative.
Posted by leaderqueen | Monday, January 07 2013 at 5:16PM ET
Agree with Lex- I was worried that stricter capital requirements would prolong the lending crunch and even be deflationary; we haven't been out of the recession for long enough. I also distrust regulation that restricts the market in general--not because I believe the market doesn't screw up, but because I believe that the market is incredibly good at figuring out how to get around regulation, and that screw ups with distortions are worse that regular screw ups. Unexpected consequences to Basel requirements might promote riskier lending in other areas, for example. Regulation should focus on increasing information, and reducing conflicts of interest where possible.
Posted by mfriedrichs | Monday, January 07 2013 at 5:18PM ET
1. The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

2. During periods of stress it would be entirely appropriate for banks to use their stock of high quality liquid assets (HQLA), thereby falling below the minimum.

3. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

4. European and American banking stocks surged because they will incur much reduced costs due to the implementation of the relaxed rules.

5. Banks in many other counties will have no benefit, as supervisors have already asked for strict liquidity rules, and they are not willing to take it back.

6. On the negative side, the main objective of Basel iii is to restore investor confidence. The Basel Committee has developed the new framework as a response to the crisis, and has explained (time and time again, every month since November 2010) the need for these strict rules.

Although it is true that Basel iii is an overreaction to the market crisis, it is way too late now to "ease" the rules and make investors happy the same time. This is simply a red flag for investors, leading to the conclusion that banks could not really comply.

I agree with the Liquidity Coverage Ratio (LCR) Basel iii amendment, but I cannot agree with the way it was presented.

George Lekatis
Basel iii Compliance Professionals Association (BiiiCPA)
Posted by George_Lekatis | Monday, January 07 2013 at 7:07PM ET
It will be extremely important to take advantage of the opportunity and contribute to the improvement of business in general but particularly medium and small enterprises. It will be required to measure and publish the use of the opportunity to return the faith in the American Banking community. Same apply to funds transfer back from foreign banks.
We have a responsibility for the global economy similar or greater than for political stability.
Posted by Felipe Franco | Monday, January 07 2013 at 10:28PM ET
The postponement was a good idea. The regulators are still examining each bank to determine if it has enough liquidity so the system is not likely to implode if Basel III is delayed. Before adding more regulations, I think we need to get a better understanding of some basic questions such as when does the amount and complexity of regulations become a problem in itself? And when does a one-size-fits-all standard work and where should it give way to a case by case assessment? I have sat through a number of meetings with banks discussing the impact of Basel III, Dodd-Frank, Volker, Durbin, etc. and it is clear that many banks are adrift if not drowning in a compliance tsunami. I was struck by the statement by the CEO of one small rural bank that his bank has a bookkeeper, not a CFO who is a CPA with an MBA and a large support staff, and has gotten by with the bookkeeper for decades, but now finds it does not have the resources to deal with the onslaught of new and increasingly complex regulations. As a former regulator, I have always thought that a sure sign of when the regulatory system has gone awry is when it forces the closure of safe and sound banks. The problem is that new regulations add to rather then replace existing regulations. Do we know when the system will become too complex to deal with? Have we made an intelligent and informed decision that eliminating banks of a certain size is justified by the benefits of regulatory complexity? I think Congress has blindly charged down the road to enact more laws and regulations and needs to hold up for a while and get a better sense of what it is doing before going further. Exhibit A could be risk weighting capital ratios. That may work up to a point but my sense of Basel III is that at best it took a snapshot of risks as they existed in 2008 and now is attempting to force a highly complex model based on those risks onto all banks for the indefinite future. That model is already outdated so it will likely distort the markets now and increasingly in the future as the risk profiles change. As for one size fits all, there should clearly be a minimum amount of capital for all banks based on general principles of safety and soundness but we need more of a case by case approach to determine what additional capital is needed for each specific bank from time to time.
Posted by amuranaka | Tuesday, January 08 2013 at 3:34PM ET
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