Regulators are expected to miss a global deadline to finalize Basel III capital and liquidity requirements by yearend.
Already well into the fourth quarter and facing more than a thousand comment letters from financial institutions, the banking agencies simply don't have enough time to sort through a host of issues raised about their June proposal, observers said.
"There's a lot of substance in lots of letters on lots of important issues in key sectors of the industry that requires attention," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. "Once the agencies have read them all, and summarized them all, they've got to sit down and figure out what are they going to do on all the outstanding questions, which is going to require a lot of negotiating. I can't see how they can finish that fast."
Community bankers have also successfully raised the stakes for regulators by enlisting the help of Congress. A majority of the Senate, including lawmakers from both political parties, sent a letter to the heads of agencies in September arguing that the proposal was too complex and expensive for community banks.
"It's going to be very difficult for regulators to meet the January 1 deadline," said Greg Lyons, a partner at Debevoise and Plimpton in New York, whose firm provided advice on a comment letter filed by the American Bankers Association, Financial Services Roundtable, and Securities Industry and Financial Markets Association (SIFMA). The trade groups asked regulators in their joint letter to undertake further study before adopting a final rule to prevent any negative economic consequences.
Regulators have yet to even answer some of the most basic questions for the industry, Lyons said.
"It's a very fundamental question: who does this apply to? Does it apply to community banks? Does it apply to insurance and savings and loan companies? When does it apply to them?" Lyons said.
All three banking regulators – the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) – have done extensive outreach with the industry to educate them about the proposal, including conference calls and meetings. Observers said their approach may indicate early optimism that they could make relatively few changes in an attempt to finalize the rule on time.
"Perhaps the agencies thought this would be … less of a remake, less of a divisive issue," said Gregg Rozansky, a counsel in the financial institutions advisory and financial regulatory group of Shearman & Sterling, who agrees regulators are unlikely to complete the rule by the deadline. "But now the industry is looking to greatly broaden the scope of the review. They're going well beyond the questions and trying to re-open so many different things for discussion."
Spokeswomen for the FDIC and Fed declined to comment, while a representative for the OCC did not respond to a request for comment.