Basel III Implementation in the U.S.Banker Resource
June 27, 2014 — 4,602 views
Basel III Implementation in the U.S.
The economic crisis that began in 2007 and accelerated dramatically in 2008 reached the peak of its impact at the beginning of 2009 as President Barack Obama took office in the United States. Shortly thereafter, the administration attended a meeting of the G20 finance ministers where the Basel III Accord was reviewed and adopted. This accord contained a number of provisions designed to prevent such a wide-ranging, global economic crisis from happening again. Mostly, the accord was concerned with capital and liquidity levels at major, national and multinational financial institutions. These institutions were the root of the problem in 2009, and targeting them was a popular way to ensure future stability.
In the United States, meanwhile, Congress was working on the legislation now known as Dodd-Frank and widely appreciated as the most sweeping set of reforms for the United States financial sector in more than a generation. The law passed and went into effect shortly thereafter, but its provisions left one burning question in the mind of industry watchdogs and financial institutions: How will this reform impact adoption of Basel III and what does it all mean?
Dodd-Frank is Simply More Lenient than Basel III Recommendations
Though the G20, which includes the United States, voted to implement the ideas contained in the Basel III Accord, the country has so far made no real movement on implementing those ideas in federal regulatory law for financial institutions. Though Dodd-Frank does enforce higher requirements for capital and liquidity at major banks, its requirements are well below those enforced by Basel III. Because the Basel III recommendations are entirely optional and have no set deadline for adoption by G20 participants, this is not necessarily in conflict with the agreement established in 2009.
Dodd-Frank also permits a more favorable buffer zone for financial institutions and does not require the unique, countercyclical buffer requirement that was made central to the Basel III set of guidelines at the G20 financial summit in 2009. This allows banks to take more risky financial moves in the United States than they would be able to do in those countries overseas that have adopted provisions in line with Basel III recommendations and guidelines.
A Different Approach to Ratings Agencies
One of the most important parts of Basel III was its consistency with the Basel II set of guidelines in terms of ratings agencies. Basel has long been dependent on ratings agencies and their critique of financial institutions when determining capital requirements, rates, leverage, and other ratios. This is not a tactic taken in the United States, where Dodd-Frank actually bans financial institutions from advertising their analyst credit ratings to consumers as a way of doing business. Regulations generally do not adhere to credit rating criteria in the United States as a result, which might give banks more freedom to make riskier trades or to avoid the costs associated with higher levels of financial regulations overall.
The United States Has Taken Some Steps, But Not All of Them
Dodd-Frank is an initial attempt to bring the U.S. banking sector in line with Basel III, but it falls short in terms of its liquidity and capital requirements, buffer zones, and use of ratings agencies. As a result, banks in the United States are subject to less regulation, can take somewhat riskier financial moves, and can participate in investment types that are all but prohibited in countries where Basel III has been written into regulatory conditions.