Regulators Face Tricky Balancing Act Over Basel III

By Donna Borak

U.S. regulators are facing a series of difficult choices as they weigh how to finalize Basel III capital and liquidity rules next year. On one side are international regulators, who are watching to see how closely the U.S. adheres to an international framework agreed to by the industrialized countries of the world. On the other are community bankers and many members of Congress, who are demanding changes to how regulators initially proposed to implement the agreement, which is designed to improve the quality and quantity of capital that banks must hold. Some observers predict regulators may soon take the Solomon approach, separating the process into two parts, allowing them to move ahead with rules that would strictly apply to the largest banks, while delaying and making significant compromises to a separate set of capital and liquidity guidelines for community banks. “The goal of the U.S. is to try to finalize the capital rules and also the liquidity rules as quickly as it can to preserve the hoped-for global framework,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics. “To do that, they’re going to have to separate the community bank stuff that is politically contentious and so difficult to do into a free-standing rulemaking and finalize the quantity and quality capital rules in the first notice of proposed rulemaking and the advanced proposed rules in the third NPR, which is Basel III, as quickly as they can.”