Basel III:Politicians leading the Banking Regulators

Following my last post in relation to the G20 summit in Seoul (On the brink of entering the Basel III era...) I wanted to share some further thoughts, since the G20 leaders signed off the Basel Committee’s new bank capital and liquidity framework (known as “Basel III”) and committed to adopt and fully implement it by the end of 2012.

However, the behaviour of some countries throughout the discussion on Basel III has demonstrated how nations tend to act in their own national interest. For example, the efforts of France and Germany to weaken the BCBS09 proposals were typical of the financial crisis, whereby politicians and regulators have become more insular.

There are also signs that the consensus among regulators about what the regime should look like is not as strong as it had appeared. The Swiss have pre-empted the introduction of the new regime, which involves significantly higher capital and liquidity requirements, by imposing far tougher requirements on their two systemically important banks.

In addition, with Dodd-Frank, the United States have introduced their own legislation to address some of the issues in Basel III.

Even with these national efforts, it is not yet known how many countries will fully adopt Basel III and to what timescale. This is important because the key success of Basel III will only be realised if the different jurisdictions implement the regulatory framework in a consistent manner.

The knock-on effect of these various distortions has created market uncertainty as to the correct balance between systemic safety and the promotion of economic growth, making an emerging consensus harder to achieve.