Risk Europe: Industry should stop fighting Basel III and focus on transition

Senior Basel Committee member tells banks to get involved in negotiations over the phase-in period for Basel II reforms

Banks must focus on negotiating the transition period for the Basel II reforms rather than continuing to fight to scrap the measures, says José María Roldán, director general for banking regulation at the Bank of Spain and chair of the standards implementation group of the Basel Committee.

Speaking at the Risk Europe conference in Frankfurt this morning, Roldán said both the Basel Committee and the Financial Stability Board are currently considering an appropriate transition period for the new measures on capital, liquidity and leverage, but they are struggling to engage the industry.

"The problem we have is that the industry is still fighting the long-term equilibrium and they are not ready yet to talk about transition. My message to the industry is to stop fighting and concentrate on negotiating the transition," he said.

Although politicians have insisted the measures should come into force by the end of 2012, Roldán made clear there should be a lengthy phase-in period to allow banks to adjust their business models as appropriate.

"In terms of transition, of phasing in, I think we have plenty of time. 2012 is where all this will start, but I have no problem whatsoever to give the industry in certain areas, for instance in terms of capital definitions, a five-year transition period, from 2012 to 2017. This would give them time to adjust their business models," said Roldán.

I have no problem whatsoever to give the industry in certain areas, for instance in terms of capital definitions, a five-year transition period, from 2012 to 2017.

But despite the concession of a transition period, the Basel Committee is still under pressure to finalise its proposals by the end of 2010 – an idea that has caused much concern among bankers, who feel the package is so complex and challenging that it should be modified and submitted to a further round of consultation and impact assessment. Roldán admitted calibration would be a challenge, particularly on the liquidity rules, but he showed no sign of wavering on the year-end deadline.

"The calibration is going to be very difficult. With capital we have Basel I and Basel II, and now we're doing Basel III. But we never had a regulation on liquidity, so it's very difficult to set the right numbers because we don't have a precedent. We are creating something from scratch and we have to accept that the uncertainties surrounding the calibration are bigger," he said.

On the leverage ratio, he also conceded that although the end target was to move it to Pillar I of the Basel framework as a binding constraint on balance sheet size, there is no agreement to do so. For the time being, it will be introduced into Pillar II "with a view to migrating to Pillar I", he said.

When it comes to planning the implementation of the standards – an aspect for which Roldán is specifically responsible as chair of the standards implementation group – he said it would be wrong to get too side-tracked by possible differences in the timing and application of the measures in different jurisdictions.

"Sometimes we and the industry get nervous about a level playing field. In the US, they didn't apply Basel II because it would have meant lowering capital standards – that was the rationale. So the industry and regulators need to relax a bit on the level playing field. There may be cases where [it] is an important issue, but not in all cases," he said.