Global Bank Capital Regime at Risk as Regulators Splinter Over Basel Rules

Capital standards designed to fortify the global financial system are eroding as European officials, beset by a debt crisis, rewrite the regulations and U.S. rulemaking 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 U.S. 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 U.S.,” 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. U.S. 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.

http://www.bloomberg.com/news/2011-08-19/global-bank-capital-regime-at-risk-as-regulators-spar-over-rules.html