Bankers lament growing global regulatory fragmentation

Piecemeal roll-out of Basel III will be “enormously costly”

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The post-crisis era of globally harmonised bank prudential standards co-ordinated by the Basel Committee on Banking Supervision may be drawing to a close, bank regulatory and risk specialists have warned.

“I certainly observe that there is a slowdown on the Basel Committee and there appears to be a shift back slowly to the individual jurisdictions deciding their own fate,” said Jeff Samuel, Americas head of group regulatory and governance at UBS.

In recent months, a number of financial industry insiders have argued that the committee is failing in its mission to co-ordinate the roll-out of post-crisis regulatory reforms, known as Basel III. Several important jurisdictions represented on the committee have shown little sign of meeting agreed adoption schedules for fresh market risk capital standards and new liquidity regulations, to the despair of internationally active firms that fear a piecemeal implementation of the reforms will harm their business. 

“It’s going to be very difficult for firms as the harmonisation question continues to be out there, especially as in the US under the current administration, there have been a lot of indications that Basel rules may not be followed as much going forward,” said Cindy Williams, an independent consultant and former regulatory co-ordinator for the Americas at Credit Suisse. “Especially for very large international banks I think it’s going to continue to be an issue and probably more than it has been in the past as various countries decide to go their own way.”

Samuel and Williams were speaking at the Risk USA conference in New York earlier today (October 25).

Samuel cited the net stable funding ratio, agreed by the Basel Committee in 2014 and slated for implementation by member jurisdictions for 2018, as one example of where the global consensus on rulemaking was breaking down. The US prudential regulators proposed a first draft of the NSFR in May 2016, but have yet to produce a final rule.

“As a Swiss-regulated bank we are already subject to the NSFR. We have a large US presence but we don’t expect that [NSFR rule] to come out of the Fed any time soon; that is the suggestion we have heard,” he said. Samuel added it appears there is “less momentum” among US regulators to implement new prudential standards following the publication of the first part of the Treasury department’s report on regulating the financial system in June.

In the report, the department recommended delaying the implementation of both the NSFR and the Fundamental Review of the Trading Book – Basel’s new market risk capital standard, finalised in January 2016 – in order to better analyse the potential impact of these rules. However, earlier this month, Craig Phillips, counsellor to the US Treasury secretary, said the US was committed to enacting both requirements.

The European Commission included both FRTB and NSFR in its proposed revisions to the Capital Requirements Directive and accompanying regulation in November 2016. But the timeline for implementation is still unclear, with the Council and Parliament of the EU yet to examine the proposals in detail, and the EC openly talking of a postponement to the launch of FRTB.

Rodney Sunada-Wong, chief risk officer for broker-dealer swaps trading at Morgan Stanley, speaking at the same conference, warned that consistent implementation of these rules was not the only priority for internationally active firms; co-ordinated timing was also important.

“We definitely look forward to, and encourage, communication across borders about unifying approaches over time, because it’s costly if you have to implement once, but if you have multiple versions at different timings [this] is enormously costly.”

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