Basel Focus Shifts From Surcharge to Liquidity Rules

By Donna Borak

The fight over a capital surcharge for the largest banks took center stage in 2011, at least in the international Basel III process, as chief executives of some major banks publicly clashed with regulators over the issue. The industry failed to sway regulators from instituting such a charge, but bankers are hopeful they can have a bigger impact on first-time proposed liquidity rules, which are expected to be a top issue in 2012. Unlike capital rules, which regulators have labored over for decades, the drive to create liquidity standards is an entirely new process. During the financial crisis, firms that were well capitalized failed quickly because of a relative lack of liquidity. Under the Basel III plan, firms are being required to meet both a short-term and long-term liquidity requirement. Since its release last year, however, the plan has worried bankers, who consider it unworkable. Regulators are already showing signs they are willing to listen to those concerns, including agreeing in September to take steps to give banks more time to prepare for the rules. Federal Reserve Board Gov. Daniel Tarullo has also explicitly said regulators are willing to make adjustments to the proposed liquidity framework. Unlike with the surcharge debate, however, regulators have been much more open to hearing out the industry on constructive fixes for the liquidity plan. “It’s the first real opening to compromise on any of these rules,” said Karen Shaw Petrou, a partner at Federal Financial Analytics Inc.