The current system of national implementation does not favour full implementation of post-crisis regulatory reform, says German central banker Joachim Wuermeling.
Basel III should be fully implemented at all internationally active banks at the national level, said German central bank board member Joachim Wuermeling in a speech in Washington DC last week.
Wuermeling, also an ECB supervisory board member, was speaking on the role of international cooperation in supporting economic prosperity, stability and progress as policy goals. In particular, he noted the work of the BCBS (Basel Committee of Banking Supervision) in making the banking system safer.
“Since 1974, regulators in the Committee have been developing international minimum standards and guidelines to harmonise the supervision of internationally active banks,” Wuermeling said. “Even though its standards are only non-binding agreements, these are typically implemented in more than 100 countries.”
The now-finalised Basel III package will make internationally active banks safer in the future, he said. But he emphasised that it relies on full implementation at the national level, without which Basel III loses value dramatically in terms of financial stability.
Wuermeling’s comments regarding recent discussions with his staff were particularly telling:
At some point, the discussion turned to the less than optimal experiences with the previous Basel standards. Some pointed out that the US did not implement the Basel II standard in full, despite having pushed for it in the first place. That led to the question how complete the implementation could be if other jurisdictions simply cherry-picked.
But then I saw two colleagues whispering and laughing – and I asked what it was about. One of them, quite reluctantly, explained that it may be true that Basel II implementation in the US diverged from what the EU had hoped for – but that it was the EU which had been found to be materially non-compliant with the Basel III standard. The room suddenly fell silent.
Finally, someone asked: will it be different this time around?
Indeed, it has long been argued that Basel II did not have sufficient judicial strength and that inconsistent implementation across jurisdictions allowed banks to circumvent capital requirements in search of higher profitability, possibly contributing to the global financial crisis.
According to Wuermeling, the BCBS has reduced the likelihood of a ‘regulatory race to the bottom’ and the opportunity for regulatory arbitrage. But – as with Basel II – the current system of national implementation still does not favour full implementation.
International cooperation can only work if national politics are able to overcome the tendencies towards less than full implementation, he said.
“What we need is complete implementation, nothing less: all internationally active banks – be they American, European, Asian or from any other region – need to be subject to these minimum standards – otherwise we have failed to achieve a truly international compact.”
While he noted that smaller institutions which are not internationally active should be subject to less complex rules – a path being pursued in the US, EU and the BCBS itself – Wuermeling warned against the same regulatory easing for internationally active mid-sized banks.
Now that Basel III has been finalised, the focus has moved towards evaluation and implementation monitoring. But according to Wuermeling, the BCBS still has other risks on its agenda. These include the regulation of sovereign exposures, as well as emergent risks from climate change, crypto assets and ‘BigTechs’ expanding into banking business.
“Those examples also show that risks and stakeholders can’t be grasped within national borders which shows very clearly that there is no alternative to international cooperation,” he said.
