The lengthening road to Basel III

Speaking at a seminar organised by Financial Access for senior Indonesian bankers last month in Amsterdam, a Director of DNB (the Dutch Central Bank) argued that implementing the more stringent capital, liquidity, and risk management requirements agreed in the context of "Basel III" was an urgent business.  But not so urgent that a weak but quick and "politically achievable" deal should be agreed fast, just for the sake of showing rapid action.  The markets and analysts would see through this, and real progress in improving systemic stability would be hollowed-out in the process.  Much better, Paul Hilbers argued, to take a couple more years about implementing a set of measures with real bite.

Judging by what is now emerging, the MerKozy axis is listening.  Germany and France are apparently preparing a proposal that would phase compliance with Basel III over a longer period than initially mooted, allowing substantial breathing room to Euro-banks out to 2018 for the nastiest bits of the new rules (on ALM and funding/asset structures).  Isn't this introducing so much delay that the effects of the new initiatives are effectively killed?  The argument advanced is that the effect of the new regulation on bank lending and the "real economy" must be taken into consideration.  But by 2018 we could easily see a full credit cycle, a commodity boom and bust, or a European real estate slump that is only just starting to recover by then.  Surely the new rules make sense, and deserve real implementation pressure, or they are simply wrong, and don't?  Banking will always have risk; that's inherent in the function and healthy for the economy.  Does Basel III go too far?

The French and German banks clearly think so, and have raised sufficient noise in the right circles to get some heavyweight support.  The Dutch banks probably agree, but as usual have no grip on their regulators, who are trying to play 'best kid in the class'.

-Jan Cherim

Here is today's Financial Times scoop on the Franco-German initiative:
http://www.ft.com/intl/cms/s/0/7f8485a8-4500-11e1-a719-00144feabdc0.html#axzz1kH2YF4XU