Fractured consensus

The dispute between the US and many of its allies over Iraq has eroded US commitment to multilateralism and damaged the credibility of multilateral institutions. How will this affect Basel II?

Regulatory capital rules do not merit comparison with war. But the failed efforts at collective diplomacy over Iraq may put the global consensus needed to achieve the Basel Committee’s goal – a universally applied regulatory regime – out of reach.

US bank regulators are now saying they’ll “go it alone” if the Basel Committee doesn’t deliver an Accord they like. In Congressional hearings in late February, Roger Ferguson, vice-chairman of the Federal Reserve Board of Governors, said the US would only apply the Accord to the top 10 banks (though others could be approved later). Donald Powell, chairman of the Federal Deposit Insurance Corporation, and John Hawke, head of the Office of the Comptroller of the Currency, questioned Basel II’s untested assumptions, its complexity and its relevance to many smaller banks in the US.

The Accord needs a new US champion. Its most effective backer and one of its chief architects, William McDonough, will soon be retiring as president of the New York Fed and as head of the Basel Committee. He may end up looking like Woodrow Wilson, circa 1919, if another respected internationalist doesn’t take up his campaign in the US.

Things don’t look much brighter in Europe. EU members are embroiled in debates over many aspects of the Capital Adequacy Directive, which will implement Basel II in the EU. Mirroring the US regulators’ concerns over Basel II applicability, EU regulators are now mulling a ‘two-speed’ Accord – one for large banks and one for small.

Meanwhile, the Committee is trying to foster the perception that Basel II is right on track for implementation in 2006. It may well be. Many of the serious issues that have delayed it in the past are now agreed (or, like worries over pro-cyclicality, tacitly dismissed or ignored). The Committee says it will release the results of its third quantitative impact study and also circulate its new consultation paper next month. But as attention turns from design to implementation, the Committee may find that, during its years of hard work to craft Basel II, the world’s appetite for this type of multilateral regulatory regime has diminished.Risk