Published December 07, 2012
LONDON – Europe's banks expect two rule-making meetings next week to help to lift some of the regulatory fog dogging a sector that faces a year-long delay to the implementation of tougher banking standards.
European Union lawmakers and member states meet on Tuesday and Thursday to hammer out a deal that would enshrine the stricter global rules on capital and liquidity in European law.
These rules, known as Basel III, are the world's regulatory response to making banks less risky, forcing them to hold more capital after many were bailed out by taxpayers in the 2007-09 crisis.
The Basel Committee, which wrote Basel III, meets on Wednesday and Thursday to scale back the impact of its new liquidity rule so that banks have more flexibility in what cash-like assets they must hold from 2015.
"Hopefully, the meetings next week will make enough progress to give banks the clarity they need to get ready for the new requirements," said Simon Hills, an executive director at the British Bankers' Association (BBA).
"They should also reduce the regulatory uncertainty that is so unhelpful to markets and investors making assessments about bank business models and structures to inform their investment decisions," Hills added.
Sharon Bowles, who chairs the European Parliament's economic affairs committee, said there was a "lot of nearly done things", but issues such as bank bonuses and trade finance still needed sorting out.
Some industry officials expect a headline deal on the EU rules to leave many details to be sorted out in the new year.
Even if a deal is reached, the globally-agreed January 2013 start date for Basel's capital rules won't be met in Europe, with a delay of up to a year now on the cards.
"A pragmatic solution would be to extend the implementation date until the beginning of 2014, rather than doing some parts mid-2013 and the rest six months later," Hills said.
Philippe Richard, director of international affairs at French banking supervisor ACP, told a conference in Brussels on Thursday that implementation could be pushed back to between June and December next year.
"But we should keep up the momentum. We have to keep pushing ahead," Richard said.
Pressure on the EU to try to meet next month's deadline has eased after the United States signaled that it won't comply on time.
Many of the biggest European and U.S. banks already comply with Basel III's minimum capital requirements of a 7 percent core Tier 1 ratio, a bank's main benchmark of health.
But a delay in formal rules would cast doubt on whether banks will provide enough data for regulators to finalize Basel's liquidity rule and leverage ratio in time for 2015.
The Basel Committee, made up of banking supervisors from nearly 30 countries, is under pressure to meet a December deadline for revamping the liquidity coverage ratio (LCR).
"We will have to agree to agree. There is too much at stake," a European regulatory source said of the meeting.
The rule as originally drafted required banks to hold a buffer of mainly highly rated government bonds from 2015 to withstand a 30-day run of customers withdrawing their deposits. The rest of the buffer, about 40 percent, could be in highly rated corporate debt or cash.
Hills said that the BBA expects the Basel Committee to be a little more flexible on the liquidity coverage ratio by allowing assets other than corporate bonds to be included in the minority component of the buffer.
Banks hope that equities, mortgage-backed assets and assets accepted by central banks will also be eligible for inclusion.
The 30-day stress scenario used to determine the size of a bank's liquidity buffer may also be made less stringent, meaning that it would need to hold fewer liquid assets.
The LCR was due to be introduced in 2015 but regulatory and banking officials say that it is now likely to be phased in gradually, with 60 percent compliance in 2015 and full introduction by 2019.
However, banking officials fear that markets and investors will apply pressure on banks to comply fully by the original start date.
"I think you are still going to see the major banks being ahead of a phased-in timetable," said Richard Barfield, of consultancy PricewaterhouseCoopers.
The Basel Committee may not announce its changes next week but wait for endorsement by its oversight body in January.
(Editing by David Goodman)