WASHINGTON — In a stunning move, the European Union signaled that it will not follow the Basel Committee's recommendations on standardized credit, operational and market risk rules, citing concerns that the proposals would unduly increase capital requirements and stifle economic growth.
European Commission Vice President Vladis Dombrovskis told a banking conference in Brussels on Thursday that member countries have deep concerns about the direction of the Basel Committee on Banking Supervision's capital rules.
Those reservations — despite assurances from members of the committee that final rules will not significantly increase capital requirements — have led the European Union to conclude that it will not require its members to implement the rules when they are finalized early next year.
"As things stand, the proposals Basel has issued for consultation would imply significant capital requirement increases in all areas. As far as the EU is concerned, there remains work to be done on a number of areas which are important for the EU economy," Dombrovskis said. "At a time when we are focused on supporting investment, we want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe's banking sector."
The announcement is the biggest and most concrete rift in a post-crisis international financial framework that had been gradually fraying for years. The U.S. has routinely pushed the Basel Committee — on which it wields substantial influence — to adopt tighter and more prescriptive rules, and often adopting more stringent rules than those agreed to by the committee anyway.
Banks have been concerned that the final phase of capital rules for credit, market and operational risk were moving in an even more prescriptive one-size-fits-all direction — a characteristic that has led some observers to call the final phase of the Basel III accords Basel IV.
Fed Gov. Daniel Tarullo, who heads the central bank's supervisory committee and is a leading voice on the Basel Committee, attempted to assuage those concerns earlier this month in an interview on CNBC, saying he understood why some signatories to the Basel accords saw the new rules emerging as a "Basel-IV-like effort." But he said the committee was moving to "hew to the original purpose" of the rules and not raise capital.
Dombrovskis added that the EU will "come forward with a revision of our own legislation" in coming months, further deepening the wedge between the European member states and the U.S.-led international standard.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, said in a research note Thursday that the announcement shows the frustration that EU members have had with the direction of the Basel Committee, and demonstrates that regardless of what the committee says, the Europeans do not believe that the new rules will take their concerns seriously.
"Mr. Dombrovskis' speech made it clear that the EU thinks the new rules will raise capital even though Basel continues to issue reassuring statements," Petrou said. "As we have noted, both the EU and Basel can be right in that Basel's final standardized rules might not 'significantly' raise global regulatory capital but nonetheless have a very costly impact in many EU nations."
The EU's announcement is likely to significantly boost already heavy pressure on the Federal Reserve to revise or rethink its approach to capital requirements. During testimony Wednesday before the House Financial Services Committee, Fed Chair Janet Yellen fielded several questions about the EU's review of the cumulative effects of post-crisis banking regulation, but she maintained that the rules had made the financial system safer.
"We are carefully monitoring how our regulations are working and, by and large, my conclusion is that we have a safer and sounder banking system," she said.