The banking industry is asking regulators to pause to assess the impact of all reforms undertaken in the post-crisis environment. And not before time.

The banking sector responses to the latest innovation from regulators were published in March this year – the idea that standardised approaches for calculating capital charges on bank assets could be used as a floor for internal risk models. The details are highly technical, but the responses also focus on a broader concern. This change is potentially far-reaching, at a time when regulators are still putting into place the final pieces of the post-crisis Basel III framework.

The Basel Committee on Banking Supervision is still working on new ways to measure risk in the trading book (see Reg Rage, p132) and new standardised methods for credit risk and operational risk. Meanwhile, rules on capital charges for securitisations and on long-term liquidity – the net stable funding ratio – were only completed late last year. The US and EU only recently started moving to the central clearing of derivatives, and rules on securities financing and margin requirements for non-cleared derivatives are still being drafted.

Little wonder that the industry response to this new capital floors initiative – call it Basel 3.5 – is to ask regulators to pause and take stock of what has already been done. The banks surely have a point. Indeed, the Basel Committee has promised to assess the impact of all reforms undertaken to date as part of its work programme for the coming year.

That assessment is needed, and until it is complete, a regulatory pause makes sense. Already, the Financial Stability Board is fretting over the (albeit intended) consequence of Basel III – the reduction in fixed-income market-making by investment banks (see cover story, page 18). At a time when certain eurozone members are clearly still unstable, and the Bank of England wants banks to consider a possible China slowdown as part of the 2015 stress-test process, regulators need to know how far their reforms are affecting the banking sector’s ability to do its job of funding economic growth.

But from the regulators’ perspective, the fear is clearly one of momentum lost as the 2008 crisis recedes in the memory. A Republican-dominated Congress in the US is already talking about repealing parts of the Dodd-Frank Act, and centre-right members of the European Parliament are arguing for a re-examination of regulations as
part of Jean-Claude Juncker’s growth agenda. For their part, elected politicians and the banks who lobby them need to reassure the central banks that slowing down the breakneck pace of regulatory reform does not mean throwing it into reverse.

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