Isda AGM: Banks to blame for regulatory fragmentation, says Basel Committee’s Coen

Bank lobbying has encouraged national supervisors to water down global standards, says deputy secretary-general of Basel Committee

Banks are paying the price for trying to influence the shape of new capital rules, with a resulting fragmentation in regulatory standards making life more difficult for globally active firms, according to William Coen, deputy secretary-general of the Basel Committee on Banking Supervision.

Several national regulators have deviated from the Basel III rules in recent months – in some cases, following a strong lobbying push from banks and end-users. For example, legislators in Europe agreed in February to allow the continent's banks to ignore a Basel III capital charge for credit valuation adjustment (CVA) when trading with corporate, sovereign and pension fund counterparties.

Proponents of the exemption had argued that the CVA charge didn't make sense for corporate and sovereign clients, given that trades with these entities aren't captured by the mandatory clearing requirements under the European Market Infrastructure Regulation. Pension funds have also been handed a temporary three-year exemption.

The rationale for leaving them out was that these clients don't tend to have large amounts of liquid assets available to meet clearing house initial and variation margin requirements. However, the resulting uncleared, uncollateralised trade would instead be subject to a hefty CVA capital charge under Basel III, and banks would likely pass that cost on to clients.

It is an argument the European Parliament, in particular, was sympathetic to, but instances like this create an unlevel playing field that will create problems for global banks, said Coen.

"One thing that I think would stand you in very good stead is to avoid lobbying – influencing policy is probably a better way to put it. We hear so much about fragmentation, but then the banks and trade associations discuss at great length trying to lower the standards. And what we are seeing now is that you reap what they sow. So if there is a regulation that is being watered down in one jurisdiction but the global version still prevails, then that doesn't make your life easier, does it? Now you have got to comply with different sets of rules in different jurisdictions," said Coen, speaking on a panel at the International Swaps and Derivatives Association's annual general meeting in Singapore this morning.

However, other panellists argued that a long list of new regulations had emerged in recent years, and that banks were right to give feedback if they felt the rules were overlapping, inconsistent or just plain wrong.

"If you look at the different policies in isolation, most of them are well intentioned. There are a few blatantly politically driven proposals, but the majority of the rest are well intentioned and might have the right result. The problem we have is that sometimes when you look at the interaction between the different proposals, some are trying to address the same risks and there is a very high overlap, and some of them end up being extremely burdensome," said Athanassios Diplas, senior adviser to the Isda board. "If we see something wrong, then we need to raise it, but the industry should also be intellectually honest and not say it is black on Monday and white on Tuesday."

In an earlier presentation, Wilson Ervin, vice-chairman of the group executive office at Credit Suisse, had shown a slide showing some of the regulations that had been proposed to combat systemic risk – it included Basel Committee capital, liquidity and leverage rules, as well as domestic ring-fencing proposals.

"There are a lot of ideas out there. It seems like we are pretty much emptying the medicine cabinet for this problem without really understanding the diagnosis," he said.

The Basel Committee's Coen said regulators were aware of the heavy burden on the industry, but stressed much of it is necessary. However, in an attempt to discourage national regulators from deviating from the agreed Basel text, the committee has improved its monitoring of member country implementation, he added. So far, four detailed regulatory consistency assessments – on the US, the European Union, Japan and Singapore – have been published.

"This is not something we did too well in the past," said Coen.

Another focus for the Basel Committee has been to analyse the consistency of risk-weighted asset (RWA) numbers reported by banks. Analysis published earlier this year found there was a wide variation in RWAs calculated by 15 participating banks for trading book exposures – a result that caused some to question the credibility of the Basel risk-based capital system.

"You are probably aware of the work the Basel Committee is doing on risk-weighted assets. To say that this analysis we are doing is an existential moment for the committee might be a bit over the top, but I want to emphasise that the credibility of the risk-weighted concept is at stake, and it has caused a lack of confidence in risk-weighted assets. Since the crisis, we've seen risk-weighted assets falling at a time when everyone would think risk-weighted assets would be increasing. So, for us, this is an extremely important body of work on risk-weighted assets and what to do about it," said Coen.