Basel & prudential standards: US moving faster than world

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08/12/2013 by Financial services regulatory practice
Basel & prudential standards: US moving faster than world

At a glance

US regulators are eager to complete rulemakings implementing Basel III and Dodd-Frank’s Enhanced Prudential Standards. This desire is compounded by public and congressional criticism of the delay in establishing a post-crisis supervisory framework – criticism that has been getting louder every year since Dodd-Frank’s passage.

US regulators are eager to complete rulemakings implementing Basel III and Dodd-Frank’s Enhanced Prudential Standards. This desire is compounded by public and congressional criticism of the delay in establishing a post-crisis supervisory framework – criticism that has been getting louder every year since Dodd-Frank’s passage.

The evolving urgency is best illustrated by the recent public statements of Treasury Secretary Jack Lew. Just before the summer, he stated that it was too early to judge Dodd-Frank’s efficacy at curbing “Too Big To Fail” (TBTF) because many of Dodd-Frank’s rules were not yet finalized. However, last month he indicated that time may be running short by suggesting that additional rules would be in the offing if TBTF is not addressed by year-end.

In our view, regulators are driven to finalize at least two sets of rules this year, namely:

  • Dodd-Frank’s Enhanced Prudential Standards for large domestic and foreign banks
  • A heightened Supplementary Leverage Ratio (SLR), applicable to global systemically important banks (G-SIBs) – i.e., those with over $800 billion in assets

Furthermore, US regulators will propose four other rules this fall, which we believe will be fast tracked for finalization in early 2014. These are:

  • Basel’s Liquidity Coverage Ratio
  • Basel’s capital buffer for G-SIBs
  • Bail-in debt and equity capital requirements for G-SIBs, to facilitate an orderly resolution
  • Capital charges for firms which are heavily reliant on wholesale funding

While some of this upcoming regulation is currently only applicable to the US’s eight G-SIBs, we believe that the heightened SLR and bail-in debt proposals may be broadened to include those firms which are subject to the Advanced Approaches under Basel – i.e., those with greater than $250 billion in assets.

A key uncertainty is whether the rest of the world will follow the US where the US is going further than the coordinated approach of Basel (e.g., the heightened SLR, debt bail-in, and wholesale funding proposals). Regarding the heightened SLR in particular, the US regulators indicated they would sacrifice “coordinated efforts” and a “level playing field” for “more robust” approaches, even if that means going it alone. US regulators did not believe Basel’s SLR went far enough, and they expressed concern that Basel views the SLR as a “backstop” to risk-based capital ratios (rather than as an equally important form of prudential capital requirements).

Our Financial Services Regulatory Brief issued in June predicted that the second half of 2013 would be busy with a host of key rulemakings related to prudential standards. That viewpoint has been confirmed. Our updated perspective of the US regulatory timeline for the remaining proposals is contained in this Financial Services Regulatory Brief, along with our view as to whether other countries will follow suit.