Author: Mark Johnson

It’s Not Over Yet

el By the time this magazine reaches you, the final draft of Basle II will have been unveiled.Those longawaited capital adequacy rules have been touted as the biggest change to the way banks are regulated in years.Yet even before they have been issued, they’re in trouble.The decision by the US authorities to apply the new rules to just a handful of banks—perhaps as few as 10—threatens to undermine the concept of a level playing field across competing financial centers. Basle II has drawbacks aplenty, but some of the arguments advanced in the last month for partial implementation don’t bear much analysis.

The superior quality of bank regulation in the US will put lenders there at a disadvantage,we’re told. Really? On that basis,we’d better abandon attempts to regulate—and constantly improve—oversight. Let’s not forget that bank regulators went into this second round with their eyes open, nor that the New York Federal Reserve was a key driving force behind the whole process. If Basle II is wrong, it’s not suddenly gone wrong. No crafty European banker has slipped in a couple of killer clauses at the last moment.

But enough of the carping.What about the realpolitik? The European Commission remains committed to applying the new guidelines across its banking sector, indeed is about to issue a consultation document on how it will write the new guidelines into its directives. But Italy has the presidency of the European Commission in the second half of 2003, spanning much of the crucial period when the capital adequacy legislation will be drafted. Finance minister Guilio Tremonti has made public his opposition to the new rules, arguing they’ll hurt smaller companies and smaller banks.

There’s likely to be too much momentum now for Basle II to be derailed. But the unilateral action of the US regulators has given added ammunition to critics beyond their shores. This saga is not over yet.

Until next month,

Mark Johnson