Basel reforms may be delayed, but not scrapped

Banks warned this week that the Basel III reform could lop 3% off economic growth over the next five years.

The sector has lobbied for months to push back not only on timing but also change key elements, such as planned harsher treatment of deferred taxes and minority stakes when it comes to calculating how much capital to set aside.

Basel is seen by the G20 group of leading countries as their core response to the worst financial crisis since the 1930s so that taxpayers won't have to step into the breach again.

The G20 has set an end of 2012 date for implementing Basel and a longer phase is now looks inevitable.

However, despite heavy lobbying by banks, it has become clearer over the past week that policymakers are only willing to compromise over timing of Basel III in return for keeping the package essentially intact.

Nout Wellink, chairman of the Basel Committee which authored the draft reform, pointed out on Friday that banks have returned to profitability thanks in part to public sector support.

Such profits can therefore be used to beef up capital and liquidity levels, he told top bankers in Vienna.

"The line in the sand has been drawn and there will be no going back," said Simon Gleeson, a financial services partner at Clifford Chance lawfirm, who is attending the Vienna meeting.

"The view being taken is there is almost no point arguing anymore. The public sector has made up its mind on what it's going to do," Gleeson said.

G20 finance ministers began to break ranks over timing last week when they met in Korea, saying there was room to introduce a longer phase in for Basel III.

But nobody called publicly for ditching any core element despite behind-the-scenes wrangling over leverage caps and how to improve the quality of bank capital.

Wellink moved in line on Friday, saying any changes to the content of Basel III would not be fundamental.

"In some countries, minority interests are a big thing, or bancassurance models, or deferred tax assets play a bigger role than on average," Wellink said.

"What you can do then is to try and find solutions, and most of these solutions you'll find in the area of grandfathering and longer transition periods," Wellink said.

Banks will also get relief elsewhere through a likely delay in the inroduction of tougher capital rules on trading books that had been due to take effect next January.

With few politicians wanting to be seen siding with the banks in public, the industry is frustrated at not winning bigger concessions.

"I don't understand the urgency of how rules are put forward. Why not take time to get a solid internationally agreed action plan, maybe a year later," said Hugo Baenziger, chief risk officer of Deutsche Bank, said in Vienna.

"G20 meetings... they can't agree on anything," added UBS Chief Executive, Oswald Gruebel.

Still, the Basel Committee meets mid-July to sketch in actual figures for higher capital and liquidity requirements for G20 leaders to endorse in November.

Wellink said Basel's own impact assessment will conclude that overall, the reform brings benefits and manageable costs.

"There appears to be a dialogue of the deaf going on," said Graham Bishop, an EU financial services expert and former banker.

"If we get the truth wrong we could regret this. It's intuitively obvious if you raise capital and liquidity requirements, the banks are going to do less lending," Bishop said.

After G20 finance ministers killed plans for a global bank tax last weekend, they can focus more directly on pushing through Basel III to signal progress on reforms.