Bank-capital battle makes Japan, EU allies against US push

TOKYO (BLOOMBERG) - Bank regulators from Tokyo to Frankfurt are joining forces to resist a United States-backed push for stiffer capital rules that could heap billions of dollars of new requirements on lenders.

Highlighting the stakes, top regulators from Europe, Japan and India are pressing their case in public, shedding light on divisions in the Basel Committee on Banking Supervision as it races to wrap up work this year on the post-crisis capital framework. They want the global standard-setter to soften key proposals for how banks calculate the capital they need to finance lending and trading.

The proposals now on the table could result in an overall increase of as much as 70 per cent in the capital banks must have, said Shunsuke Shirakawa, vice commissioner for international affairs at Japan's Financial Services Agency, a member of the Basel Committee. Disagreement also exists on how much banks should be allowed to borrow against their assets and how far to limit their holdings of government bonds.

"If you add together all the proposals that have been made, it's a significant increase no matter how you look at it, and that is a fact," Mr Shirakawa said in an interview late last month. "So there is a need to make adjustments by the end of the year."

The US moved faster than the rest of the world after the 2008 crisis to revamp banking oversight, often seeking stricter standards than global minimums set by the Basel Committee. Daniel Tarullo, a Federal Reserve governor, has led the US argument that the proposals under debate this year are essential to preventing the industry from gaming rules by manipulating internal models lenders use to determine their own capital levels.

The Basel Committee promised in January not to boost capital requirements "significantly" as it wraps up work this year on bank-leverage limits and a revision of the way credit, market and operational risks are measured. The regulator describes this as putting the finishing touches on the framework known as Basel III, put in place after the crisis. 

The financial industry, which has lobbied aggressively in recent months, says the overhaul is so far-reaching that it amounts to a new wave of regulation - Basel IV. Iain Mackay, group finance director of HSBC Holdings, said in May that lenders would be "pretty much stuffed" if Basel sticks to its plan.

The industry's concerns are now shared by the regulators, and Mr Shirakawa isn't alone in his insistence that the Basel Committee keep its word. European Union finance ministers have made clear they expect the rules to come in as advertised. Valdis Dombrovskis, the EU's financial-services chief, said Europe needs to "speak with one voice" to influence decisions at Basel, where nine EU countries, as well as the European Central Bank, have seats at the table.

The Basel Committee brings together regulators from nearly 30 countries, including Japan's FSA, the ECB, the U.S. Federal Reserve, the People's Bank of China and the Brazil's central bank. The committee reports to the Group of Governors and Heads of Supervision, chaired by ECB President Mario Draghi.