The European Union is preparing to follow the lead of the U.S. regulators and push back the formal implementation of global banking reforms, which is due to go ahead on Jan. 1, by at least six months, as the EU struggles to agree on many aspects of the package. While there’s a good chance that the delay could easily go beyond six months, experts warn that regulators should make sure the delay is short and not risk throwing the process off track.
The new rules, known as Basel III, are the world's regulatory response to the 2007-09 financial crisis. They are considered a critical step to ensure large institutions are sufficiently cushioned against future financial shocks.
Based on the bank capital proposal, banks will be required to hold the strictest form of common-equity capital at 7 percent of their risk-based assets, up from 2 percent currently. The largest global financial institutions are required to hold additional capital buffers of between 1 percent and 2.5 percent. The international agreement called for the regulation to be phased in between January 2013 and January 2019.
"Whatever happens, the new law cannot become effective on Jan. 1," one EU official told Reuters, who spoke on condition of anonymity. "The middle of the year would be a realistic assessment."
European banks on Saturday have asked the European Commission to postpone the introduction of Basel III by a year to 2014 after U.S. regulators delayed application of the new requirements. Brussels is also worried that Washington’s decision to ignore the deadline will put European banks at a disadvantage to U.S. rivals.
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"We are now very troubled over the possible repercussions that the most recent statement from the U.S. Authorities may have for the international competitiveness of Europe's banks," wrote the European Banking Federation in a Nov. 21 letter sent to the EU Internal Market Commissioner Michel Barnier, according to Reuters.
It said EU banks were facing sweeping regulatory changes including new capital requirements and liquidity buffers, "all the while, our U.S. competitors will not have matching obligations imposed on them in parallel, or in a foreseeable future."
Due to a flood of industry comments on the proposals, the Federal Reserve, Federal Deposit Insurance Corporation and Comptroller of the Currency issued a joint release on Nov. 9 saying they will no longer require U.S. banks to follow the Basel III capital rules by Jan. 1.
More interestingly, they did not provide a substitute effective date for the rules, arguing that they are “working as expeditiously as possible to complete” them.
If Basel III had been in place last year, the world's major banks would have needed to find $485 billion to bolster their financial strength, according to the official assessment by the regulators who designed the rules in Basel, Switzerland.
In May, Fitch Ratings took a look at the 29 global systemically important financial institutions, or G-SIFIs, which as a group represent $47 trillion in total assets, and estimated that they might need to raise roughly $566 billion in common equity in order to satisfy the new Basel III capital rules.
“This potential capital increase would imply an estimated reduction of more than 20 percent in these banks’ median return on equity (ROE) from about 11 percent (over the past several years) to approximately 8 percent to 9 percent under the new regime,” the rating agency said. “Basel III thus creates a tradeoff for financial institutions between declining ROE, which might reduce their ability to attract capital, versus stronger capitalization and lower risk premiums, which benefits investors.”