The real impact of the new package of Basel agreements is not what they do.  It actually isn’t all that much and that which would make a difference won’t happen for a decade, if ever.  What matters is that global regulators and central bankers recognized the hard reality facing them since at least 2013: global financial practices and national objectives differ so much that the only way to salvage a trans-national framework is to establish the equivalent of a demilitarized zone.  With the pretense of peace thus established, each side goes about banking as it thinks best although the facade of a global accord is preserved to prevent a resumption of full-fledged competitive warfare based on home-country regulatory arbitrage.  We will shortly provide clients with in-depth analyses of all of Basel’s actions along with IAIS’s important new consultation on systemic insurance regulation.  However, as I’ll discuss here, the real action lies now not in complying with these rules, but in designing the national standards that fit on either side of Basel’s DMZ.

To be sure, all the public statements from Basel, GHOS, the IMF, and FSB yesterday had the “lasting peace” tenor of the Versailles Treaty.  What did key regulators say about what’s next?

Here’s what the EU had to say:

The agreement will now be subject to a thorough Commission consultation and impact assessment to evaluate the consequences for the EU economy before it can be translated into EU law taking into account the results of the impact assessment.

And, while Secretary Mnuchin vaguely praised the final standards, the U.S. banking agencies were remarkably evasive:

The agencies will consider how to appropriately apply these revisions to the Basel III reform package in the United States and any proposed changes based on this agreement will be made through the standard notice-and-comment rulemaking process.

Here are just a few of the big decisions now facing these agencies, questions I expect banks will be racing to answer for them:

  • Should the U.S. abandon the advanced approach, which we expect will be done for all but the GSIBs or any large BHC that flunk the tests designed to differentiate complex BHCs from those that stick to their intermediation knitting?  Doing so makes a lot of sense, as we noted in a recent paper, but the politics of this is of course quite complex, especially among the agencies.
  • When the U.S. moves to implement Basel’s new standardized approach (SA), will it act on the 2013 promise to revise the U.S. mortgage weightings in our own SA?  Doing so will give the agencies another chance to make these considerably more stringent, a battle the agencies now might win if Congress gives community banks the leverage-ratio way out included in the Senate legislation.
  • What happens now to the operational risk-based capital rules that have limped along since 2006 with little real value either to operational-risk mitigation or financial stability?  Congress was moving to block U.S. adherence to Basel’s proposed approach and will do so again if the final one is as objectionable to large banks.  What then happens to the advanced measurement approach and the overall U.S. framework?
  • How will the new GSIB leverage surcharge fit into the U.S. supplementary leverage ratio and, especially the enhanced one imposed on the very largest BHCs?  How would this work if custody banks get the relief on excess reserves included in the Senate bill and advancing in the House?
  • If the EU, Japan, China, and other nations do their own thing sort of within the Basel framework but well below U.S. requirements, what then for foreign banks doing business in the U.S.?

And, that’s just for starters.  Given the critical importance of capital to franchise value, market structure, and financial stability, each of these answers and those to equally pressing questions around the world has profound impact.  We thus enter an era of capital advocacy and analysis unparalleled since the period after the great financial crisis led to the 2010 Accord.