The U.S., E.U. and Japan may be at risk of failing to adopt global standards that will greatly improve the quality and quantity of capital that banks must hold, according to global regulators on Monday.
In its latest progress report, the Basel Committee on Banking Supervision said it discovered deficiencies among the 27 member countries in how they were adopting Basel III, which regulators signed off on in September to help skirt a repeat of the 2008 financial crisis.
While the initial findings will require more "detailed analysis … this report highlights key areas where domestic implementation may be weaker than the globally-agreed standards," Stefan Ingves, chairman of the committee and governor of the Sveriges Riksbank said in a press release.
The committee did not offer specifics on the deficiencies, but said its full analysis will be published in September.
The report included three levels of review including how countries were working to meet the rules, if they were consistent with three separate Basel accords, and whether they were aligned when it came to risk-weighted assets.
Regulators have been under pressure to uniformly adopt the capital rules in a timely manner to ensure harmonization across the global banking system or else risk regulatory arbitrage.
"Full, timely and consistent implementation of Basel III will be fundamental to raising the resilience of the global banking system, in maintaining market confidence in regulatory ratios and in providing a level playing field," according to the Committee's latest progress report.
Federal Reserve Board Gov. Daniel Tarullo has also repeatedly urged the necessity of consistent implementation of the rules among the various partner countries, which include Canada, Germany, and Spain.
"If the benefits of all these improvements to existing capital requirements are to be realized, it is crucial that capital standards be not only agreed upon globally, but also implemented consistently across jurisdictional boundaries," Tarullo said at a Senate Banking Committee hearing in March.
Still, Ingves noted that while countries had taken serious steps to comply with the rules, there was still much more work to be done by certain nations.
"To date, significant progress has been made, but there are a number of countries that have missed the globally-agreed implementation dates for Basel II and 2.5, and where their ability to meet the Basel III implementation deadline of January 1, 2013 could prove a significant challenge," said Ingves.
For example, Argentina and Russia have been slow to implement Basel II, while the U.S.has until recently been slow to adopt Basel 2.5.
Although the report, which was based on data as of March 31, noted that the U.S. had failed to propose its Basel III rules that time, the situation changed last week. The Fed voted on June 7 to finalize its market-risk rule, as well as release proposals that establish a minimum capital requirement, leverage ratio and a countercyclical buffer.
U.S. regulators had been under the gun to make strides in implementing Basel III prior to a summit meeting with the leaders of the Group of 20 in Los Cabos, Mexico later this month.
"The U.S. believed that if we missed at least issuing a proposal before the June G-20 summit, the meeting in Mexico would lead to a real collapse of the overall Basel framework and that's why they really pushed this thing out," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc.
"They still don't agree on a lot of it; a lot of it is still controversial within the agencies. But if they didn't have anything on the table before June 18th, President [Barack] Obama and Treasury Secretary [Timothy] Geithner were going to go to Los Cabos and have the E.U. tell them, 'Forget you, we're out of Basel' and they knew it."
Under the U.S.' Basel III plan, institutions will have to hold a minimum of 4.5% common equity Tier 1 capital; a tier 1 capital ratio of 6% and tier 1 leverage ratio of 4%. The capital rules will become effective Jan. 1, 2013 as required under the Basel agreement, but firms would not be required to be in full compliance until 2019.
The latest progress report is only the second of its kind since regulators agreed last September to publish regular updates. The aim of such publicly scrutinized monitoring is to incentivize members to fully adopt the standards ahead of deadlines.