Bankers Go From Blasé to Ballistic Over Basel III

By Donna Borak

When global regulators last year announced final international capital and liquidity standards, bankers for the first time in months breathed a sigh of relief, appearing even to welcome the agreement. Even though the Basel III framework would be tougher, it was significantly less burdensome than most bankers had expected, and U.S. negotiators acceded to European demands to allow longer transition times in order to give institutions a chance to meet the higher criteria. But flash forward to today, and large bank executives are sounding considerably less positive about Basel III, warning it could stifle economic growth even as they shed assets in an attempt to comply with regulators’ deadlines. Most observers said the change of heart is mostly due to the Federal Reserve Board’s second round of stress tests, which determined which institutions could pay a dividend and effectively forced banks to prove they could meet the new Basel III standards much sooner than expected. “It really was the first time the rules hit the balance sheet in a nonacademic way,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. “It was a reality check. … Even though the banks weren’t forced to comply with them immediately, they were forced to show how they would by the Dec. 31, 2012 deadline to get permission to pay the dividends or make other capital distributions; and that really forced the hard understanding of the cruel reality that is Basel III.”