The Basel Committee on Banking Supervision consists of 27 member states.
Capital standards designed to fortify the global financial system are eroding as European officials, beset by a debt crisis, rewrite the regulations and the United States' rule-making stalls.
The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing.
Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the US is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.
"The game on the ground has changed in Europe and the US," said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. "The realists in Europe realized that their banks cannot raise the capital they'd need to comply. US banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to."
The Basel committee revised its capital standards and outlined new rules on liquidity and leverage after the 2008 crisis exposed the vulnerability of the banking system. Credit markets froze following the collapse of Lehman Brothers Holdings Inc, sending the world economy into its first recession since World War II. Basel III was meant to create "a much stronger banking and financial system that is much more resilient to financial crises," said Mario Draghi, who will take over as president of the European Central Bank in November.
Basel standards aren't binding, so each country needs to write its own rules putting the agreed-upon principles into effect. The European Commission proposed regulations to Parliament last month that would translate Basel III into law. A majority of EU governments also must endorse them. US regulators led by the Federal Reserve have to come up with their own version, though they don't need legislative approval.
The proposed EU rules, submitted by financial services commissioner Michel Barnier, omitted a ratio designed to improve banks' cash positions, deferred decision on a rule to limit borrowing, revised capital definitions and extended some compliance dates. In the US, regulators are stymied because the 2010 Dodd-Frank Act bars the use in banking rules of credit ratings, which Basel III relies on to determine risk.
"Implementation is a big concern in Europe and the US," said Karel Lannoo, head of the Centre for European Policy Studies in Brussels. "The EU crisis isn't over; the US isn't safely out of its mess. If we can't get the rules that were supposed to protect the financial system from collapse, we won't have changed anything to help us the next time around."
While the Greek debt crisis dampened enthusiasm for tightening standards last year, the Basel committee managed to develop reforms to reduce risks in the financial system, according to Lannoo and other analysts. Increased capital requirements will create bigger buffers against losses. New liquidity rules will ensure banks have enough cash to deal with panicky customers withdrawing funds.
Renewed concern this year that Greece may be unable to pay its debts, and similar worries about larger EU members Italy and Spain, have darkened Basel's prospects. The sputtering economic recovery in the US and Europe has hurt, too.
The European Commission estimates that the region's banks will have to raise about $600 billion to comply with the new capital rules. Banks say that will harm their ability to lend at a time when economies are flailing.
US economic growth for the first quarter was revised down to 0.4 percent, while the second quarter's initial figure was 1.3 percent. In Europe, gross domestic product fell from 0.8 percent in the first three months of the year to 0.2 percent in the second quarter.
Both the Bloomberg Europe 500 Banks and Financial Services Index and the KBW Bank Index of US bank stocks have fallen about 30 percent this year. That wiped out more than $700 billion of market value on the two continents.
The European proposal alters the definition of capital that Basel III aimed to tighten when the committee agreed not to allow anything other than common shares to count toward the top-quality bank capital regulators examine.
During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations - hybrid securities that act like debt and equity at the same time - which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU's implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn't authorized to speak.
At Landesbank Hessen-Thueringen, a state-owned lender based in Frankfurt known as Helaba, silent participations account for more than 50 percent of the bank's 6 billion euros ($8.6 billion) of capital. Helaba withdrew from the Europe-wide stress tests in July after regulators refused to count some of those hybrid instruments as capital.
