From the March 2012 issue of Treasury & Risk magazine

Basel III: Next Steps

Allowing national deviations raises anxieties.

Although Basel III implementation is not due to be completed until 2019, the move to adopt the new rules is already under way even as the full impact of the measures on the banking industry and corporations remains unclear.  First announced in 2010 as a means of bolstering banks’ capital reserves in the aftermath of the financial crisis, Basel III includes a requirement that banks raise their core tier one capital ratios from 2% to 7%.

Up to this point the financial industry has concentrated on understanding Basel III and its requirements, but the focus has shifted increasingly to implementation, according to Dan Taylor, industry issues manager at J.P. Morgan Treasury & Securities Services and vice chair of the International Chamber of Commerce Banking Commission.

“A number of major jurisdictions around the world are now starting to grapple with how they can get to the implementation stage,” Taylor says.

This raises the issue of geographical variations in how Basel III is implemented. “There are places in Basel III that allow for some national discretion,” Taylor says. “It comes down to what deviations will there be from the basic Basel III framework in various jurisdictions around the world. In China, for example, the regulations are pretty much Basel III as a whole, but all of the deadlines have been moved forward one year. Even in the EU, the European Commission can come up with recommendations but there still has to be regulation in all of the various EU jurisdictions. This opens the door for modifications and deviations.”

How much of a problem would such variations be in practical terms? Banks could find themselves having to comply with different capital requirements in different jurisdictions, Taylor points out.

Even if a bank doesn’t operate in a particular market, it may still be doing business there—and might find it is competing with a local bank with lower capital requirements. “The cost of capital gets built into transaction pricing, which means that we could see fairly sizable fluctuations in pricing from place to place, based on what the cost of capital is,” Taylor adds.

As banks focus on implementation, corporate treasurers are keen to understand how Basel III will affect their businesses. A recent survey by treasury technology provider IT2 showed 54% of respondents were worried Basel III could limit their access to bank funding. It also found that as of the second half of 2011, 66% of treasurers planned to issue bonds within the next three years, up from 36% a year earlier. These figures suggest treasurers concerned about the impact of Basel III are already looking to diversify their funding activity.

Requiring banks to hold more capital is expected to result in higher funding costs. While no exact figures are available at this stage on the increased costs, a picture is emerging of the areas that will be affected. “We’ve been running Webinars with corporates on Basel III, explaining the liquidity regime, impacts to trade finance as well as the proposed derivatives rules,” says Ruth Wandhöfer, head of regulatory and market strategy for Citi Global Transaction Services. “For example, Basel III considers corporate balances less valuable than previously, which may have an impact on the remuneration associated with these.”

The treatment of trade finance instruments under Basel III is one topic that has attracted particular attention. “The implementation of Basel III is expected to make it more difficult and more expensive for customers to access trade finance to support global trade, unless they are working with the right banking partners,” observes Rick Striano, Americas product head for trade and financial supply chain for the global transaction banking unit of Deutsche Bank.

In October, the Basel Committee adopted two changes to its treatment of trade finance to promote trade with low-income countries, but stopped short of making other changes, such as exempting trade finance instruments from the leverage ratio.

In Europe, legislation associated with the Basel III implementation may address some of these concerns.

“The EU is currently working on CRD IV [the Capital Requirements Directive] and CRR [the new Credit Requirement Regulation],” Wandhöfer says. “The rapporteur of the European Parliament’s Economic and Monetary Affairs Committee delivered a draft report at the end of 2011 which takes into account, in a positive way, the extra changes that the industry and markets all feel are necessary on the trade finance side.

“Given that the Basel III proposals—in particular the leverage ratio and liquidity regime—did not take into account the fact that trade finance instruments are intrinsically less risky while at the same time fulfilling the important purpose of supporting global growth, the Parliament’s draft report is addressing some of these shortcomings,” she adds.


Lord Abbett senior economist Milton Ezrati criticizes the Volcker Rule’s ambiguities in Volcker Rule Confusion.


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