A high level panel reporting to the Group of twenty has revealed that the world’s largest banks are struggling, and often failing, to implement financial rules designed to patch up the problems which caused the financial crisis. The rules, designed by the Basel Committee for Banking Supervision, have not been implemented on schedule by banks in the world’s developed economies.
The Basel 2.5 rules were supposed to come into effect at the end of last year and precede the implementation of Basel III rules, implementation of which is supposed to start in 2013. The regulations are designed to stop banks from underestimating the risks associated with their assets.
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The United States ranked behind China, India and Italy in implementation of the rules. Much of that has to do with the complexity of the rules and clashes with the Dodd-Frank regulatory reform Bill. That Bill prevents ratings from established agencies like Moody’s Corporation (NYSE:MCO) and Standard and Poor’s from being used to assess the riskiness of assets.
That clash leaves US regulatory agencies with no concrete way to measure the riskiness of their assets, at least until the regulators come up with a successful independent system for doing so.
The committee suggested that the rules implemented by authorities in Europe and Japan, while being drawn up more quickly than in the United States, are watered down versions of the guidelines that leave banks still vulnerable to risks.
Representatives from the three regions argued against the findings of the committee, suggesting that their practices were indeed sound. The discrepancy clearly portrays the complexity of the rules and the difficulty in understanding them from both an industry and a regulatory perspective.
Many have argued that the new rules leave far too much up for interpretation as individual authorities seek to draft regulations to implement the rules. With Basel 2.5 not stringently implemented across the world’s banks Basel III will be a much more difficult hill to climb.
The Basel III recommendations are due to come into effect in 2019 but a step by step implementation of rules is to start in 2013. They require a great deal of capital to be raised by the banking systems in order to shore up risks in their business and reduce the risk of a need for a state bailout.
Banking officials have argued that the need to raise and hold the extra capital will have a negative effect on their ability to lend. Banks in Europe that are currently facing grave issues will have huge trouble implementing the new rules.
Though designed to get rid of the more pressing risks inherent in the banking system, the Basel rules have managed to create problems owing to the complexity of the rules. Similar issues were seen in the Federal bank stress tests which, according to members of the Federal advisory council, caused uncertainty and confusion.
The need for a standardization of financial rules is great, even if such a thing seems impossible in the regulatory world. The complexity of that being controlled adds to the complexity of the rules. It is clear however that overly complex rules that are not well defined, and remain open to interpretation, cause more problems than they solve.