by Don Alexander, MBA
Associate, RSD Solutions Inc.
Bankers, policymakers and regulators continue to debate on the content of new bank capital requirements rather than setting global standards. In the view of recent losses by JP Morgan and recent research reports calling for more bank capital, the need for global harmonization of standards takes on a new sense of urgency.
Nicholas Veron, in a recent VOXEU communique of May 4th, The European Debate on Bank Capital is Not Just About Europe looks at the European experience. European officials are deciding on the legislation to implement Basel III agreement on bank capital, leverage, liquidity and risk management.
Officials, however, have severely underestimated the importance for reaching a global standard for financial regulation. There are two unresolved issues in Europe: (1) the legislation’s departure from Basel III provisions; and (2) whether member states would be allowed to impose their own core requirements in regards to bank capital ratios.
The first issue exists for both Europe and globally since it is about the definition of bank capital and how it should be applied to subsidiaries. EU institutions regard global harmonization as overriding good, superseding misgivings about individual provisions or national authority. Although, EU banking regulations are done at the national level and are not standardized creating a problem to see what is “liked” or “disliked”. This makes the regulations vulnerable to special-interest groups.
The crisis has changed the dynamics between the EU and global standards. Institutions are now focused more on content than global harmonization. This is complicated by a lack of a consistent approach by EU policymakers and the U.S. SEC’s delay in endorsing the proposed implementation schedule for global financial reform. An American proposal that is compliant with Basel III would encourage EU and other doubters to comply.
Global harmonization would help minimize competitive distortions inside the EU. The main problem specific to the EU is that banking services remain under national authorities. This results in a lack of a unified approach to bank supervision/resolution and pegs banks financial health to national authorities. A more timely U.S. response combined with a unified EU approach could help reduce risk.
Although, Basel III requirements do not resolve all financial regulatory issues, a global harmonization of regulatory standards would be far better than our current fragmented system. Perhaps the losses by JP Morgan Chase might force regulators to focus on implementation of a global standard. The alternative of a fragmented regulatory environment could be costly.
For more on this simply follow the link: http://www.voxeu.org/index.php?q=node/7948
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