ABA blog: Basel reforms reveal shortcomings of international standard-setting process 

Global cooperation on financial regulatory issues can be valuable and important, but when they “stray into creating standards accorded the force of law through implementing rules and regulations that are binding on U.S. firms and their customers, serious problems of accountability and transparency arise,” write ABA’s Hugh Carney and Hu Benton in a new ABA Viewpoint blog post. One of the “most concerning” proposals arising from the international cooperative process, according to Carney and Benton, is the Basel III endgame—a term for the next round of regulatory capital reforms developed by the Basel Committee on Banking Supervision.

With the expected proposal, regulators are framing an overhaul of capital requirements merely as “a tweak of existing rules,” that would be more appropriately titled Basel IV given the broad-reaching effects on the banking system, they write. Despite top regulators declaring the U.S. banking system strong and stress tests of the larger financial institutions demonstrating their ability to withstand severe economic conditions, federal regulators continue to push preexisting reform agendas.

“The participation of U.S. regulators in the work of these global groups should be conducted within a framework more consistent with U.S. law and subject to full congressional oversight and public review,” according to Carney and Benton.

They note that the proposal is “particularly ill-suited to the problem regulators claim it will solve, and one that would have painful implications for banks of all sizes and for the economy,” in addition to being misleading and dated. Basel IV has been in development for more than a decade and is a package of a dozen Basel proposals focusing on trading risk, operational risk and credit risk. The current proposal ignores liquidity or interest rate risk—the key factors in recent bank failures—which “highlights the disconnect with current concerns,” Carney and Benton write.