EU’s Basel III delay invites all to play for time

The message not to dilute reforms got lost on the way from Frankfurt to Brussels

For months, European Central Bank regulators have been warning European Union lawmakers against deviating from the internationally agreed 2023 kick-off date for Basel III reforms.

In May, Andrea Enria, chair of the ECB’s supervisory board, said he and colleagues did not see “any benefits in further delays” than the one-year pushback already granted in the aftermath of the Covid-19 outbreak. In September, fellow board member Elizabeth McCaul warned the reforms’ “effectiveness relies on the commitment of all signatories to faithful and timely implementation in their jurisdictions”.

Despite the admonishments, the European Commission (EC) has now said it will delay their implementation by two more years. Under draft proposals unveiled on October 27, phase-in of the package won’t begin until 2025 – surely much to Berlaymont lobbyists’ delight.

The decision to derogate from international accords’ timelines flies not only in the face of Enria and McCaul’s words, but also of European agencies’ own technical analyses. Both the ECB and the European Banking Authority have criticised pushes to dilute the reforms, whether through delayed implementation or skewed localisation of rules. And though the EC backed down from a ‘parallel stack’ approach to capital charge outputs widely criticised as non-compliant with Basel, it’s still opting for transitional arrangements the wisdom of which Enria has questioned.

The bloc’s executive arm can put its foot down with banks when it wants to

Ironically, the EC already mandated the adoption of one of Basel III’s more consequential elements, the revised standardised approach to counterparty credit risk, in June this year, well ahead of the overall package’s implementation roadmap. The bloc’s executive arm can put its foot down with banks when it wants to.

Its play for time for the remainder of the reforms could now herald postponements by other countries. Already, the Bank of England has quietly indicated its own adoption of Basel III will slip beyond March 2023. And there are banks in many jurisdictions that would surely appreciate some extra time to catch up with reforms.

But the implications of the EC’s decision may go well beyond the world of capital regulation. It hardly bodes well for a world where the multilateral will to tackle global challenges is in high demand but short supply.

The EU’s Basel III precedent provides a tu quoque argument to governments demanding relaxed timetables to meet international commitments. They could cite ‘domestic specificities’ when asked to do their part over emission-reduction targets, or cross-border anti-money laundering, or the global fight against tax evasion.

The EC’s draft proposal must now pass muster with the European Parliament. That gives lawmakers a chance to reconsider its significance, and its consequences – especially unintended ones.