Heavy lobbying leads to easing of Basel III banking norms

The Basel Committee will scale back many of its proposals to beef up bank capital and liquidity rules, its supervisory body said yesterday, signalling concessions in the face of lobbying by banks and governments.

The Basel Committee of global banking supervisors published a draft Basel III reform last December that would force banks to hold more and better quality capital to withstand future shocks without taxpayer help again.

It forms the cornerstone of global efforts to avoid a repeat of the worst financial crisis since the Great Depression.

The committee's supervisory body, headed by European Central Bank president Jean-Claude Trichet, met in Basel, Switzerland, on Monday where it announced changes to the draft reform.

"The agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis," Trichet said in a statement by the group of governors and heads of supervision.

The modified reforms are still rigorous enough to promote long-term stability in the financial system, Trichet said.

One country, which the Basel Committee declined to name, reserved its position until figures for higher capital and final phase in timetables are inserted in September.

Investor worries over exactly when and how much extra capital banks will have to hold cast a pall over bank stocks.

Basel Committee chairman Nout Wellink said yesterday's announcement of changes to the reforms proposals will reduce market uncertainty and further support the economic recovery.

Regulators have argued that given more time, banks can top up capital from profits and not rely completely on stressed wholesale markets to raise billions of dollars in capital.

"The phase-in arrangements will enable the banking sector to meet the new standards through reasonable earnings retention and capital raising," Wellink said.

Anthony Polini, bank analyst at Raymond James, said the news helped drive banks shares higher in New York on Monday.

"Investors don't want any new regulations that will be seen as a distraction or harmful to the economic recovery," Polini said.

Keith Davis, principal and research analyst at investment manager Farr, Miller & Washington, said: "I think we have established kind of a trend that regulators and governments are going to give some time before they really crack down. They are not going to be stupid about reforms."

It's not only banks that have been lobbying hard to modify Basel III. Countries like Japan, France and Germany have also been pushing behind the scenes for changes in the face of opposition from countries like Britain and the United States.

"I think there are some significant concessions here, although in many respects they are concessions to common sense rather than industry lobbying," said Simon Gleeson, a financial services partner at Clifford Chance law firm. "Doing something like this is bit like having a kitchen installed — you either get it on time or on spec but not both."

One change that is likely to have the single biggest impact is an easing in the way counterparty credit risk is calculated.

Longer phase-ins for leverage caps will also be welcomed by banks as will a far more flexible net stable funding ratio (NSFR) to ensure that a bank has enough long-term liquidity to stay solvent in a crisis.

"It is not surprising to see the NSFR being broadly withdrawn — it was widely regarded as misconceived — and the deferral of the leverage ratio until 2018 is a mercy," Gleeson said.

Banks will be dismayed, however, that capital charges on their exposures to central counterparties will be raised to 1-3% when the original Basel III proposal opted for a zero weighting.

The Basel Committee's reform was in response to the Group of 20 leading countries which originally pledged last year to implement such measures by the end of 2012.

Banks have argued fiercely that introducing Basel III on time would crimp their ability to lend and aid recovery. The G20 agreed in June to phase in the reform over several years. Separately, the Basel Committee had also agreed on a one-year delay in tougher new trading book capital requirements.

"We will put in place transition arrangements that ensure the banking sector is able to support the economic recovery," Trichet said.

The Institute of International Finance (IIF), which represents more than 400 of the world's biggest banks, said last month that Basel III could lop 3% off economic growth over the next five years in the United States, euro zone, and Japan and cost almost 10 million jobs.

The Basel Committee will publish its own impact assessment in August, which is expected to show that economies would suffer much less of a hit and that the reforms also bring benefits which the IIF has not quantified in its own study.