US Basel impasse casts doubt on international capital accord

As
U.S.


regulators
grapple
over
a
joint
capital
reform
proposal,
the
future
of
international
collaboration
on
bank
supervision
could
hang
in
the
balance.

Last
month,
top
finance
officials
from
France,
Germany
and
Italy
—
the
three
largest
economies
in
the
European
Union
—
sent


a
letter
to
the
European
Commission,
telling
the
governing
body
to
prepare
to
adjust
its
own
capital
reform
efforts,
noting
that
the
U.S.
was
expected
to
deviate
from
the
internationally
agreed-upon
standards.

Andrés
Portilla,
managing
director
of
regulatory
affairs
at
the
Institute
for
International
Finance,
a
trade
group
for
global
financial
firms,
said
the
officials
were
aiming
to “Trump-proof”
Europe’s
capital
standards,
pointing
to
the
risk
that
a


second
term
in
office
for
former
President
Donald
Trump
could
bring
significant
changes
to
or
even
an
outright
abandonment
of
the
latest
accord
from
the
Basel
Committee
on
Banking
Supervision,
known
as
the
Basel
III
endgame.

“If
there
is
an
event
where
the
U.S.
decides
not
to
implement
those
market
rules,
then
Europe
would
have
that
ability
to
also
suspend
implementation
or
to
change
the
rules
altogether,”
Portilla
said. “That’s
really
what
is
being
discussed
at
this
stage,
given
the
high
levels
of
uncertainty
around
implementation
here
in
the
U.S.”

Portilla
noted
that
the
concerns
are
not
limited
to
Europe.
The
Australian
Prudential
Regulatory
Authority,
the
country’s
top
banking
regulator,
addressed
the
Basel
framework
in
its
latest
annual
corporate
plan,
noting
that
the “risk
of
fragmentation”
—
meaning
notable
differences
between
jurisdictions
— “remains
elevated.”

But
the
EU
letter,
first
obtained
and
reported
on
by
Politico,
goes
beyond
adjusting
the
latest
capital
standards
from
the
Basel
Committee.
It
also
calls
for
the
commission
to
reconsider
regulatory
standards
writ
large
to “put
stronger
emphasis
on
the
competitiveness
of
the
financial
sector,
particularly
banking,
and
its
capacity
to
finance
the
economy”
as
part
of
a
broader
goal
of “reversing
Europe’s
declining
competitiveness.”

The
shift
toward
emphasizing
domestic
interests
over
financial
stability
consideration
has
some
policy
experts
and
advocates
concerned.
Dennis
Kelleher,
head
of
the
consumer
advocacy
group
Better
Markets,
said
this
mentality
could
result
in
regulatory
jurisdictions
competing
with
one
another
to
create
the
most
accommodating
policies
for
their
own
banks,
regardless
of
what
it
means
for
financial
stability. 

“It’s
going
to
kill
the
international
regulatory
regime
that
is
essential
to
preventing
financial
crises
and
catastrophes
like
the
2008
crash.
Everybody
goes
their
own
way.
I
worry
about
my
banks,
and
you
worry
about
your
banks,”
Kelleher
said. “It
is
inevitably
going
to
result
in
a
race
to
the
regulatory
bottom.
Therefore,
we’re
going
to
end
up
with
very
minimally
regulated
banks
and
financial
institutions
…
and
that
just
means
there
are
going
to
be
more
and
bigger
crashes
and
bailouts.”

Graham
Steele,
former
Treasury
Department
assistant
secretary
for
financial
institutions,
said
pro-competition
rhetoric
has
long
been
used
to
justify
deregulation
but,
in
reality,
such
moves
are
not
a “panacea
to
fix
broader
economic
issues.”

Steele,
who


left
the
Biden
administration
in
January,
said
European
officials
have
been
questioning
the
U.S.
commitment
to
the
Basel
Committee’s
latest
standards
for
years,
but
recent
events
have
emboldened
them
to
begin
edging
away
from
their
commitments. 

“Our
own
inability,
because
of
domestic
politics
and
other
dynamics,
to
implement
endgame
has
hampered
our
ability
to
push
back
on
some
of
the
things
the
Europeans
are
doing,”
Steele
said. “There’s
a
clear
sense
of
opportunism
here
that,
because
we
do
not
have
our
house
in
order,
there’s
an
opening
for
other
countries
to
revisit
some
of
these
international
principles
that
were
established
post-financial
crisis.”

The
letter
comes
as
efforts
by
the
Federal
Reserve,
the
Federal
Deposit
Insurance
Corp.
and
the
Office
of
the
Comptroller
of
the
Currency
to
implement
the
Basel
III
endgame
have
been
ground
to
a
halt
by
a
disagreement
among
the
agencies. 

The
original
joint
proposal
from


July
2023
would
have
increased
capital
obligations
for
the
largest
banks
in
the
country
by
19%.
But
after
pushback
and
the
threat
of
litigation
from
the
banking
industry,
the
agencies
agreed
to
make
changes
to
the
proposal.

Last
month,
Fed
Vice
Chair
for
Supervision
Michael
Barr
said
regulators
had
agreed
upon
revisions
that
would
have


narrowed
the
scope
of
the
framework
and
increased
capital
requirements
for
the
largest
banks
by
just
9%.
But
an
impasse
on
the
FDIC’s
board
of
directors
—
ostensibly
over
the
decision
to
re-propose
the
amended
rule
as
opposed
to
finalizing
it
—
has
put
the
amendment
on
an
indefinite
hold.

If
the
new
proposal,
as
outlined
by
Barr,
were
finalized
as
is,
it
could
raise
alarms
with
other
jurisdictions
because
of
how
it
would
deviate
from
the
standards
set
out
by
the


Basel
Committee
in
2017.
Of
particular
concern,
Portilla
said,
is
the
treatment
of
market
risks,
known
as
the
Fundamental
Review
of
the
Trading
Book.

In
a
speech
last
month,
Barr
said
the
revised
proposal
would
allow
banks
to
use
internal
models
to
assess
market
risk,
rather
than
standardized
ones,
as
called
for
by
the
Basel
Committee.
Portilla
said
other
jurisdictions
are
concerned
the
change
would
harm
their
bank’s
abilities
to
compete
for
global
capital
markets
activity.

“If
only
one
group
of
banks,
let’s
say
the
European
ones,
apply
those
rules,
then
they
feel
they
would
be
in
a
significant
competitive
disadvantageous
situation,”
Portilla
said. “And
that’s
why
the
attention
has
focused
on
those
rules,
ultimately.”

Embedded
differences
elsewhere
in
each
jurisdiction’s
regulatory
framework
make
alignment
difficult.
In
the
U.S.,
many
banks
expressed
concern
about
the
overlap
between
the
proposed
FRTB
change
and
the
current
measure
of
risk
in
the
global
market
shock
component
of
the
annual
stress
test.
Banks
say
this
would
result
in
them
being
charged
twice
for
the
same
risks.
Europe,
meanwhile,
has
its
own
distinct
regulatory
requirements,
including
so-called
Pillar
II
charges
that
are
assigned
based
on
specific
risks
at
individual
banks. 

The
standards
set
by
the
Basel
Committee
are
not
binding
and
there
is
an
expectation
that
each
jurisdiction
would
have
to
make
adjustments
based
on
their
own
legal
systems
and
existing
frameworks.
But,
Steele
said,
adjusting
for
these
differences
in
an
ad
hoc
manner
risks
undermining
the
overall
agreement.

“If
we
want
to
depart
from
international
standards
in
any
sort
of
way,
that
gives
rise
to
an
argument
that
we
are
not
being
Basel-compliant.
If
we
want
to
make
special
allowances
for
U.S.-specific
products
and
services,
that
gives
Europeans
a
hook
to
come
back
to
us
and
say, ‘Well,
you’ve
got
your
pet
issue
that
you
want
an
allowance
for,
here,
we’ve
got
our
things
too,'”
Steele
said. “It
leads
to
that
kind
of
horse
trading.
You
open
yourself
up
to
further
negotiations,
and
negotiations
down
on
the
substantive
level.”

A
move
away
from
interjurisdictional
coordination
would
be
welcomed
by
some
in
Washington.
In
a


House
Financial
Services
Committee
hearing
on
international
regulatory
bodies
in
March,
Rep.
French
Hill,
R-Ark.,
argued
that
such
groups
have
caused
U.S.
regulators
to
be “subsumed
by
European
ideas.”
At
that
same
hearing,
Rep.
Ritchie
Torres,
D-N.Y.,
asked, “Where
did
we
get
this
notion
that
the
United
States,
as
the
financial
superpower
of
the
world,
must
conform
to
European
standards
of
banking?”

But
those
involved
in
the
Basel
process
—
including
Trump’s
choice
for
Fed
Vice
Chair
for
Supervision
Randal
Quarles
—
have
said
that
such
bodies
tend
to
follow
the
U.S.’s
lead
on
policy,
rather
than
the
other
way
around.
Steele
said
it
was
advantageous
for
American
regulators
to
engage
in
international
forums,
noting
the
old
adage “if
you’re
not
at
the
table,
you’re
on
the
menu.”

Still,
large
U.S.
banks
do
not
feel
like
their
interests
are
being
represented.
One
of
the
central
complaints
about
the
Basel
III
endgame
is
that
U.S.
banks
thought
the
committee’s
intent
was
to
bring
the
world
up
to
its
standards.
Instead,
they
are
set
to
see
the
biggest
increase
in
new
aggregate
capital.

Kevin
Fromer,
president
and
CEO
of
the
Financial
Services
Forum,
a
trade
group
for
the
nation’s
largest
banks,
said
the
industry
is
not
advocating
a
withdrawal
from
Basel,
but
he
said
compliance
can
be
achieved
without
additional
capital.

“Our
view
is
the
U.S.
is
not
facing
any
capital
inadequacy
in
terms
of
our
banking
system,”
Fromer
said. “There
are
ways
to
implement
the
Basel
III
endgame
here
in
the
United
States
that
don’t
raise
capital
of
any
significance
for
the
institutions
that
would
be
impacted,
which
right
now
are
going
to
be
predominantly
the
GSIBs,
our
members.
We
firmly
believe
it
can
be
implemented,
have
fidelity
to
the
standard
and
not
raise
additional
capital
for
the
institutions
here.”

However
the
issues
facing
the
Basel
III
endgame
are
resolved
in
the
U.S.
and
abroad,
some
see
the
current
episode
as
a
pivotal
moment
for
global
regulatory
policy.

Sean
Vanatta,
a
financial
regulation
historian,
said
the
overarching
trend
in
economic
policymaking
has
been
to
favor
individual
national
interests
over
shared
global
goals.
In
last
month’s
letter,
Vanatta
sees
that
shift
spreading
to
regulatory
policies,
too,
and
undermining
the
notions
of
cooperation
that
have
underpinned
the
Basel
Committee
and
other
international
organizations
for
decades.

“The
question,
going
forward,
is
whether
nationalist
financial-regulatory
policies
will
be
pursued
constructively
or
cynically,
here
in
the
U.S.,
in
Europe,
and
in
other
important
markets,”
he
said. “Whatever
happens,
I
think
the
Basel
Committee
is
losing
credibility
in
the
way
that
the
neoliberal
internationalist
project
is
losing
credibility.
For
better
and
worse,
liberal
internationalism
is
on
the
wane.”