Quant Congress USA: Basel timelines meaningless, says panel

The banking industry is moving ahead with Basel III implementation – even in the US, where regulators only recently released their Basel III proposals

The banking industry is pushing ahead with Basel III implementation regardless of official deadlines, as institutions fear the consequences of being left behind, according to panellists at the Quant Congress USA conference in New York today.

Under the Basel III timetable, higher capital requirements will be phased in from next year, with the rules coming fully into effect from January 1, 2019. However, these timelines are virtually meaningless, and many major banks expect to be compliant well in advance, panellists said.

"When I look across other banks out there, the entire industry is moving very rapidly to Basel III, so the official timelines that have established are not so useful. The real timelines are what are the banks actually doing out there, and they have all rushed to that fairly quickly," said Daniel Rodriguez, chief risk officer for the Americas in the equities division at Credit Suisse.

Credit Suisse has moved quickly to implement the new rules, and has already made significant reductions to risk-weighted assets (RWAs). However, Rodriguez suggested many banks will move faster than the official schedule to ensure they are able to make the requisite changes to balance sheets, realising this may be difficult if every firm leaves it to the last minute to shed RWAs.

"Every bank knows we need to go to Basel III in period six, and so what does that mean? It means reducing risk-weighted assets, cleaning up your balance sheet and restructuring your business in a way that is very capital efficient. So if you know that other players in the game are going to do that at period six, it is beneficial for you to do it at six minus one. The other players start figuring that out, and what ends up happening is everybody is trying to rush to getting Basel III compliant very quickly," he said.

The regulatory environment and the uncertainty have really stifled financial innovation

Other panellists - Sanjay Sharma, chief risk officer, global arbitrage and trading at RBC Capital Markets, and Terry Benzschawel, managing director, portfolio analysis and quantitative strategy at Citi's institutional client group - also said their institutions had moved ahead with Basel III compliance.

"I'm not sure to what extent Citi's response to Basel III and Dodd-Frank in general is typical of US banks, because of our role in the bailout during the financial crisis. We took a lot of money, we are very grateful to the taxpayer for keeping us in business, and I think because of this our senior management has taken the approach that we will accept the new environment," said Benzschawel.

"We haven't pushed back on any of the regulations, and we adopted the view early on that the world has changed and what the public expects from financial institutions has changed. With that has come a substantial change in our business model. One of the positive things about Citi is that we are far along the road to implementation of the Basel regulations and viewing our business in terms of both Basel and Dodd-Frank," he added.

This decision to move ahead with implementation came even before US regulators released their proposals for Basel III implementation. The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation issued a notice of proposed rule-making on Basel 2.5 and Basel III implementation last month - but the rules have already had an impact on business models, said Benzschawel.

"Already, banks have exited businesses and failed to take advantage of opportunities that might have been out there to take advantage of before the rules had gone into effect. And they haven't because they know they are just not going to be able to do it," he said.

There has also been an impact on financial innovation, he added. "The real thing from my point of view as a modeller is that I see that the regulatory environment and the uncertainty have really stifled financial innovation. I have been working on products that I think could be useful - for example, buying and selling liquidity - and the current regulatory environment almost makes a project that might be a private sector solution to liquidity requirements unworkable. If interest rate swaps had been proposed in the current environment, it would probably not be able to actually be implemented."