In race to adopt Dodd-Frank, US falls behind on Basel III
The first progress report on the big bank adoption of the Basel Committee on Banking Supervision Basel rules was issued Tuesday.
In the report, the committee, which operates under the Bank of International Settlements, finds that the Basel II levels of capital adequacy is largely met by financial institutions in the United States. The European Union, however, is a little further ahead with full adoption.
As for the updated Basel III phase in, due to begin Jan. 1, 2013, the United States is making little progress in that draft regulations are not even available. Large financial institutions were scheduled to start the process in 2011. However, in a race to adopt financial reform under the Dodd-Frank Act, big banks placed Basel III implementation on the sidelines, it appears. The EU, on the other hand, published draft regulation as planned on July 20, 2011.
Still, banks have started putting aside Tier 1 capital despite no formal draft of Basel III.
Similar to the Basel III proposal, the Dodd-Frank Act contains several provisions relating to capital requirements for U.S. banking institutions.
For example, the so-called “Collins Amendment” requires that U.S. regulators impose stricter capital requirements on U.S. institutions. Basel III and Dodd-Frank have similar goals, but contain differences in the capital requirements imposed.
In the aftermath of the global economic crisis, negotiations among Basel Committee regulators led to new rules that increased the amount of capital that banks must hold on to reserve in order to cushion against unexpected shocks. It also introduced a new global liquidity framework.
The Basel committee meets regularly to set banking standards for 27 countries, including the United States, Germany, France, Britain, Japan, China and Hong Kong.
Banking groups have criticized the new rules, saying they will slow growth by reducing the amount of money banks have for lending. Mortgage originations during the three months ended Sep. 30 by the big four banks have dropped 24% since a year ago.
Last month The Federal Housing Finance Agency warned that Basel III’s stipulations to increase capital requirements would increase mortgage rates.
Basel III increases the minimum common equity capital ratio requirement for banks from the current minimum of 2% to 4.5% and the minimum Tier 1 capital requirement from 4% to 6%. These new requirements will be phased in by Jan. 1, 2015, with the phase-in period beginning Jan. 1, 2013. The minimum total capital requirement will remain at 8% under Basel III.
Regulators use the Tier 1 capital ratio to grade a firm's capital adequacy. In a call to investors Wednesday, BlackRock ($283.35 0.55%) CEO Laurence Fink noted that even though the Basel II-compliant Franco-Belgian bank Dexia held the required Tier 1 capital ration, it still required nationalization. Fink said the Dexia event is indicative that capital provisions aren't working in current form.
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