December 08, 2014
The International Review Of The Quality Of American Financial Supervision
Posted by David Zaring

The Basel committee enforces through peer pressure, rather than through resort to a formal dispute settlement process, and the peer pressure is increasingly institutionalized through IMF-like reviews of the implementation of Basel commitments.  The US just had its review, and Basel just released the report.

The big problem with the US embrace of global rules has come through its treatment of securitizations.  Perhaps most notably:

a number of divergences were identified that for some US core banks lead to materially lower securitisation  RWA [risk-weighted assets, the stuff against which you have to hold capital] outcomes than the Basel standard. These differences are mainly related to the prohibition on the use of ratings in the US rules. Pursuant to the Dodd-Frank Act, the US rules cannot include provisions related to the Basel framework’s Ratings-Based Approach (RBA) for securitisations, so the rules provide alternative treatments.

The US is not Basel compliant because its regulators are explicitly not permitted to use a tool - credit ratings - that Basel requires.  It looks like the committee may fix this not by forcing credit ratings down America's throat, but by coming up with some equivalence standard, which tells you that when Congress speaks clearly, global regulatory harmonizers must listen.  Another admission of note:

In carrying out this review, the Committee's assessment team held discussions with senior officials and technical staff of the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. The team also met with a select group of US banks.

This meet with regulated industry thing is one of the features of peer regulatory review, and it presumably gives industry yet another opportunity to make a case for its preferred version of regulation.  But then, it is also a feature of international regulation, where the cross-border parties may sometimes also play roles as representatives of the domestically regulated.

Administrative Law, Finance, Financial Institutions, Globalization/Trade | Bookmark

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