September 09, 2014
The Modest New Super-Global Trend In Bank Regulation
Posted by David Zaring

One of the reason that bank capital regulation became an international affair was to ensure a regulatory "level playing field," which would be paired with market access to the US and UK.  That is, as long as the rest of the world complied with the Anglo-American vision of capital requirements, access to London and New York would be assured.

But as former law professor and current Fed Board member Daniel Tarullo will testify to Congress today, as those global (call them "BCBS") rules have become more elaborate and comprehensive, some countries have elected to depart from them - only upwards, not downwards.  Switzerland is trying to use very, very heightened capital requirements to shrink its universal banks into asset managers.  And now the United States is enacting global rules with its own pluses.  For example, the liquidity coverage ratio, which requires banks to keep a certain percentage of their assets in cash-like instruments,

is based on a liquidity standard agreed to by the BCBS but is more stringent than the BCBS standard in several areas, including the range of assets that qualify as high-quality liquid assets and the assumed rate of outflows for certain kinds of funding. In addition, the rule's transition period is shorter than that in the BCBS standard.

The Fed is also imposing an extra capital requirement on the largest American banks:

This enhanced supplementary leverage ratio, which will be effective in January 2018, requires U.S. GSIBs [very large banks] to maintain a tier 1 capital buffer of at least 2 percent above the minimum Basel III supplementary leverage ratio of 3 percent, for a total of 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments 

And another such requirement based on the amount of risk-based capital

will strengthen the BCBS framework in two important respects. First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding. 

I think of the global efforts in financial regulation as being notable precisely because they created, incredibly informally, some reasonably specific and consistently observed rules that comprise most of the policy action around big bank safety and soundness.  The little new trend towards harmonization plus is a bit comparable to the trade law decision to create the WTO for global rules, but to permit regional compacts like NAFTA and the EU to create even freer trade mini-zones.  Some find this multi-speed approach to be inefficient and, ultimately, costly to the effort to create a consistent global program.  We'll see if the Basel plus approach rachets up bank regulation, or just disunifies it.

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