LONDON/HONG KONG (Reuters) - Reforms aimed at preventing a repeat of the financial crisis a decade ago face a critical test this week when global regulators try to put the finishing touches to one of their main pillars.
Watchdogs from the world’s leading financial centres have been trying for more than a year to finalise Basel III, their central response to the 2007-09 crisis that forced taxpayers into multi-billion dollar bailouts of undercapitalised banks.
Amid signs that the appetite for global rulemaking is waning after one of the most intensive bouts of banking reform in history, the Basel Committee of banking supervisors meet next week in an attempt to complete the Basel III capital accord.
Speakers at last week’s Reuters Financial Regulation Summit emphasised the urgent need to agree a deal, as failure to do so would call into question their global coordination.
“If somehow we can’t agree amongst ourselves, that will send a very bad signal,” BoE Deputy Governor Sam Woods said.
The United States and Europe are split over one arcane but crucial remaining element of the package, the extent to which banks can rely on their own internal risk models.
“Whether or not we can get that deal agreed will be a very important signal about whether we can continue to develop and maintain international standards,” Woods told the Summit.
Banks have been lobbying for a loosening of the regulatory noose and called for a break to new rules due to the rising costs involved and the impact it has on their profitability.
Regulators at the Reuters Financial Regulation Summit stressed they were now moving on to reviewing and tweaking what has been agreed, rather than cooking up major new reforms.
“There’s an over reliance on regulation solving the problems of the capital markets and it can only go so far,” Paul Winkelmann, chief executive of Hong Kong’s Financial Reporting Council, an accounting watchdog, said.
But Andrea Enria, chair of the European Banking Authority, which writes banking rules, insisted regulators were not running out of steam, but making sure reform programmes are completed.
“I don’t think we need to always launch new regulatory initiatives,” Enria said.
European and Asian regulators are watching the United States, where president Donald Trump has told U.S. regulators to ease up on rule-making to encourage more bank lending.
Trump’s Treasury Secretary Steven Mnuchin has recommended delaying new global bank trading book rules, a step Australia, Hong Kong and Singapore are also taking - and the European Union is resisting, potentially fragmenting standards for a period.
“My sense is the mood has changed in the U.S., you can see very clearly in the Mnuchin report a desire to move the pendulum back a little bit,” Woods said.
“I would say they have been pretty robust on bank capital in a way that I think is good, so if they tack back a little bit it’s not obvious that would present a problem for us.”
This is the moving backdrop against which the Basel Committee of banking supervisors meets next week in Switzerland a bid to complete Basel III.
“I am confident that we will reach an agreement before the end of the year,” said Enria, who sits on Basel’s oversight body, whose endorsement of a deal will be needed.
Woods was “cautiously optimistic” though gave no timeline, while sceptical banks call for regulatory clarity.
“It’s 50:50 for a deal this year,” Frederic Oudea, chief executive of French bank Societe Generale (SOGN.PA), told a banking event in Brussels last week.
Insurance regulators are having an even tougher time trying to nail down a deal on global capital rules, with Europe and the United States wanting different calculation methods.
“We will continue to work with our international colleagues to make sure that we will have this international capital standard in the coming years going in the right direction,” Gabriel Bernardino, who chairs the European Insurance and Occupational Pensions Authority (EIOPA), told the Summit.
“We don’t envisage major changes in European insurance rules,” he added.
Meanwhile banks, which are holding three times as much capital as they did before they had to be bailed out by taxpayers, face continuing costs for past misdeeds.
“You can’t rely on the regulatory environment to solve all the problems,” said Pru Bennett, head of investment stewardship for Asia Pacific at BlackRock (BLK.N).
There was a need to encourage firms to have good corporate governance and not just tick the compliance box, she said.
Regulators interviewed at the Summit also stressed the need to adapt rules in a timely way as markets change.
“Markets are very creative, and I am sure that new practices will emerge that allow them to minimise the impact of regulatory requirements, if not circumvent them altogether,” Enria said.
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Reporting by Huw Jones in London and Elzio Barreto in Hong Kong, editing by Alexander Smith