US delay on implementing Basel III a victory for financial reform foes (November 2012)

Rethinking Bretton Woods | Wed, Nov 21, 2012

By Aldo Caliari

This article reports on the recent announcement by US regulators of a delay in implementation of the reforms to the banking capital requirements regime agreed by the Group of 20 almost two years ago.  (A slightly abridegd version of this article appeared on South-North Development Monitor SUNS, No. 7492, December 3 2012).

Another blow was given to the fledgling financial reform agenda when US regulators announced a delay in implementation of the reforms to the banking capital requirements regime agreed by the Group of 20 almost two years ago. With this development, the US is poised to join the 19 (out of 27) jurisdictions represented at the Basel Committee on Banking Supervision that have not incorporated domestically the reforms, known as “Basel III.”

It is true that, according to the last report on implementation issued by the Financial Stability Board, the US is one of the countries that have already implemented “Basel II.5.” In fact, US regulators submitted a proposed rule to implement Basel II.5 in 2011, and a final rule was approved last June.[i] Basel II.5 refers to one set of reforms to the framework of capital requirements approved after the financial crisis that are expected to enter into effect before the rest of the changes to the Basel Agreement on bank capital requirements. Therefore they had an earlier deadline, originally of end 2010 (last year the Group of 20 committed to implementation by end of 2011). This set of reforms focuses on changes to how banks weigh the risks of trading activities. Among other things, the adjustments in Basel II.5 call for some safeguards to the models banks use to measure that risk and certain disclosures regarding those models, in particular with regards to securitization activities.

To the credit of US regulators, implementing Basel II.5 demanded that they grapple head-on with a challenge that most other jurisdictions are only at early stages of facing, namely, how to reduce the reliance on assessments of credit rating agencies. During the crisis, the accumulation of assets considered “risk-free” –because rating agencies said so – but that later demonstrated to be susceptible of serious risks, came back to haunt banks. So one of the reforms the Group of 20 agreed was to reduce the use of credit rating agencies as acceptable metrics of asset quality. Finding an alternative is not so easy, and that is why the mandate of the Group of 20 continues to be an aspiration for most countries (the Group of 20 recently issued a “Roadmap” for implementation of this mandate). Because the Dodd –Frank legislation in the US forbids regulatory references to credit ratings, dodging the issue was not an option, and the US rule for implementing Basel II.5 contemplates some alternatives.[ii]

However, the reforms recommended under Basel III were included in draft rules issued for comments only in June of this year. The deadline for comments of September 7 was later extended to October, with a final ruling announced to enter into effect on January 2013. On November 9, though, regulators announced that the issuance of the final rule and its implementation have been put on hold.[iii] In their release, they quote as reasons the “volume of comments received and the wide range of views expressed during the comment period.”

The rules were opposed by scores of community and small banks in the US that complain that the resulting burden will force them to cut back on loans and particularly mortgage loans.[iv]  The argument on this latter point was that the operational burden and compliance costs of risk-weighting residential mortgage loans are unachievable for lenders of that size. The expected higher risks will lead to demands for capital that are also too burdensome for small lenders.[v]

Insurers holding loans and savings companies also were among the groups complaining on the rules. They are reportedly seeking exemptions from what they say is the inappropriate application of bank-centric rules to those companies engaged in the insurance business.[vi]

The assault on Basel III is not coming only from companies, though. Thomas Hoenig, Director of the Federal Deposit Insurance Corporation, plainly called for going back to the drawing board: “Given the questionable performance of past Basel capital standards and the complexities introduced in Basel III, the supervisory authorities need to rethink how capital standards are set.  …, starting over offers the best opportunity to produce a better outcome.”[vii] In taking this view, he actually echoed recent comments made by Andrew Haldane, of the Bank of England.

There are plenty of reasons to agree those who criticize the Basel model.[viii] Drawbacks in the model are not really addressed in the Basel III iteration and, conversely, are in some cases entrenched by it.

But such genuine and justified concerns are in this case providing a cover for the biggest winners in the delay in implementation. Those are the biggest financial giants that have become more concentrated since the crisis and whose profits would have been affected by the new capital regulations. For instance, Mr Hoenig’s remarks should be placed in the context of his whole presentation, where he advocates that the main source of risk is the lack of a separation between trading and banking activity. But the big banks have done everything possible to defeat a much less radical approach to this problem embodied in the “Volcker rule.”[ix]

JP Morgan’s Jamie Dimon, in widely-reported comments last year said that the Basel agreement was anti-US. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. [x]  It is only ironic that now the European financial industry lobby is mirroring this argument on the European side arguing that the non-implementation of Basel III in the US creates an “unlevel playing field.”

The trends point, therefore, to an unraveling of Basel III. In spite of the flaws of the overall Basel model, the lack of indication that something stronger or better would take its place means this is no reason to celebrate.

[i] Federal Reserve 2012. Risk-Based Capital Guidelines: Market Risk. 12 CFR Parts 208 and 225, Regulations H and Y; Docket No. R-1401.


[ii] Not exempt from pitfalls, see for instance Americans for Financial Reform 2012, Letter commenting on “Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions.” Available at


[iii] FDIC 2012. Agencies Provide Guidance on Regulatory Capital Rulemakings, Press Release, November 9.

[iv] McGrane, Victoria 2012. Small Banks Are Blunt in Dislike of New Rules, in Wall Street Journal, August 7.

[v] Gibson, Michael 2012. Testimony before the Committee on Banking, Housing, and Urban Affairs

United States Senate. November 14.

[vi] Festa, Elizabeth 2012. U.S. banking regulators delay Basel III capital rules applying to insurers' thrifts, banks, available at

[vii] Hoenig, Thomas 2012. Back to Basics: A Better Alternative to Basel Capital Rules; Speech delivered to The American Banker Regulatory Symposium, September 14.

[viii] For a more detailed survey of criticisms see Caliari, Aldo 2011. Transatlantic Cooperation for Post-Crisis Financial Reform: To What End? Heinrich Boell Foundation and Center of Concern, April 2011. Available at

[ix] Hoenig, Thomas 2012. Back to Basics: A Better Alternative to Basel Capital Rules; Speech delivered to The American Banker Regulatory Symposium, September 14.

[x] Braithwaite, Tom and Patrick Jenkins 2012. JPMorgan chief says bank rules ‘anti-US’, in Financial Times, September 12.