Basel III- Some Opportunities?

by Véronique Queffélec on novembre 24, 2012


November 23rd, 2012

The reasons why there are Basel III, the Dodd-Frank Act, and debate over separation of commercial and investment banking in Europe is because previous regulations were not effective in dealing with the financial crisis. The rules of Basel III were adopted by global banking regulators in September 2010 and subsequently endorsed by the Group of 20 leading Economies.

Basel III is an international agreement, but implementation is left to the discretion of regulators in each nation. While Obama said in his campaign that he would urge for a “healthier banking system”, the US said it would not meet the January 2013 target date for introducing the rules.

A) US delays Basel III introduction

The Fed, FDIC and OCC announced in a joint statement on 9 November that they would not implement Basel III banking regulations by January 2013 as initially scheduled. Many institutions had expressed concerns that they might not have time to understand the rules or make system changes by January. Some argue that Basel III is too complex and should be replaced by a simple bank leverage ration, calculated as tangible equity to non-risk weight assets. Moreover, stronger regulations would reduce risk at the banks, but could sap the energy of the economy as a whole. The regulators said that they take their international commitments seriously and will continue to discuss specific implementation dates and “adjustments” in the application of Basel III to community banks.

Since Japan and Europe have expressed their intention to introduce the rules next year, major US banks will be pressed to strengthen their capital in line with Basel III. Japanese banks have already raised capital to cope with Basel 3 and should be in relatively strong position under the new framework. The challenge now is how to maintain sustained growth.

European banks will loose competitiveness. Société Générale chief Executive Frederic Oudea pointed out the potential consequences of a regulation gap that would act in favour of American banks. He said “let us not be naïve, we are actors fighting for growth within an international competition”. On the operational side, banks will have to build up their capital reserves, which will force them to cut their investments in depreciated or toxic assets. Insurance companies which the same exigencies apply to will be forced to act similarly.

Europe urges the US to introduce Basel III without delay. If the US does not stick to the agreement, the EU also needs to think what to do with the US banks in the European Union from a supervisory point of view. Germany suggested today that European branches of US based banks could be placed under EU supervision, longer discussions are to be expected on this topic soon

B) The French Banking Regulation

France’s ability to reform the country is being questioned. After the downgrade of the Standard & Poor’s agency in January, France lost its prized triple-A badge from Moody’s last Monday. Moody’s said it kept a negative outlook on France due to structural challenges and a “sustained loss of competitiveness” in the country, where business leaders blame high labour charges for dragging down exports. It also cited “sizable exposures” of its banks to weak, southern Euro Zone Countries.

French Finance Minister Moscovici revealed the main lines of the French Banking regulation during a conference organized by the French market regulator in Paris. “The idea is to separate activities that are useful to the real economy from speculative operations that banks conduct for themselves,” said Moscovici.

While he recalled that « the project will largely rest on an approach advocated by Erkki Liikanen”, he highlighted the determination of the French Government to press ahead with the reform of the country banking sector with or without the rest of Europe.

The Government is finishing the bill of the legislation that would force banks to detach their investment-banking activities into separate entities. Certain activities, such as high frequency trading and some forms of commodities trading, could be banned altogether. The bank reform would also include the creation of a new “macro-prudential” authority to better watch over systemic risks.

French newspaper Le Figaro reported today that French banks would have until July 2015 to transfer their “speculative” investment banking activities in a separate unit if proposed legislation is enforced.

Senior French bankers say that while the application of such legislations will create logistical hurdles and additional administrative and funding costs for them. It could have been much more severe. The structures of the French banks’ investment strategies are also expected to be modified.