The Bank of England's decision this week to once again delay implementing part of the Basel 3.1 bank regulation reforms looks like indecision. But in the face of an unpredictable US government, it is the best course of action.
As the Bank's Prudential Regulation Authority found out to its cost with covered bond rules in April, in cross-border regulation, moving too fast is often a gaffe.
The Bank of England on Tuesday unveiled a raft of new regulatory measures “designed to maintain stability in the financial sector while offering new growth opportunities for mid-sized banks and building societies”.
Included is a delay in implementing parts of the Fundamental Review of the Trading Book rules — part of Basel 3.1 — by one year to January 2028.
The pause applies to investment banks wanting to use internal models to calculate capital requirements for their trading activity.
The postponement will allow “time for greater clarity to emerge in other jurisdictions on their own implementation of the aspects most relevant for cross-border activities,” the Bank of England said on Tuesday.
It did not mention the US, but in January, when the Bank delayed implementing the whole of Basel 3.1 until January 2027, it said this was to allow “more time for greater clarity to emerge about plans for its implementation in the United States”.
For similar reasons, the EU last month delayed its own application of FRTB by one year to January 1 2027, having last year also put it back by a year. The EU has implemented the rest of Basel 3.
Patience is a virtue
Waiting is rarely a bad idea when trying to harmonise regulatory regimes. Having regimes that are consistent and comparable across borders is crucial to ensuring fair competition.
If the US were to implement its Basel framework more generously to the banks, it could give US banks a competitive edge over UK and EU peers.
That would be likely to delight President Donald Trump. Shortly after his inauguration in January, Trump signed an executive order demanding that for every new rule or regulation a government agency wants to introduce, it must repeal 10.
If US regulators wield such an axe over their Basel 3.1 plans, they will be gutted. And for now, there is no indication of when this disembowelling might take place.
Near miss
The PRA may have remembered what happened in April, when it burnt its fingers in haste with a covered bond reform.
Trying to change the rules on which overseas covered bonds could count as high quality liquid assets for UK banks, the PRA announced the new system without consulting market participants, and in confusing language.
Unsurprisingly, the market did not take it well. The apparent phasing out of HQLA eligibility from some non-UK covered bonds "blindsided" the market, one bank treasury manager told GlobalCapital.
The proposals not only made non-UK covered bonds less attractive to UK bank investors — they sparked market concerns that the European Banking Authority might hit back with a similar exclusion of UK paper.
The EBA is in the process of drawing up its own equivalence regime for covered bonds, which has yet to be published.
Excluding UK bonds would hurt their issuers, as the euro is the deepest market for covered bonds.
One bank funding official told GlobalCapital at the time that if the EU were to say UK covered bonds in euros were no longer eligible for EU banks' liquidity coverage ratios, it “could reduce UK bank euro orderbooks by one third”.
The sour reaction pushed the PRA into an embarrassing U-turn. The proposed changes were paused on April 17 and scrapped for good on July 15.
Now, the UK Treasury has taken ownership of the issue and is exploring a codified equivalence regime.
It is consulting market participants until September 5, by which time the EBA should have published its own report on the topic.
Back in line
Researchers at Barclays anticipate the EBA will, by the end of this month, “recommend establishing a third country regime based on reciprocity.
“We think [this week’s UK Treasury] statement and policy update bode well for a reciprocal ruling by the EBA,” they added.
That could bring relief to the covered bond market.
Up until this week, many anticipated that sterling covered bonds for overseas issuers could die. No foreign bank has issued one since the April faux pas, according to GlobalCapital’s Primary Market Monitor.
With Basel 3.1, the stakes are much higher. The UK — and the EU — are well advised to wait and see what the US decides to do.
The whole purpose of the Basel Accords was to level the playing field among banks from different countries. If the US departs from that ideal and tries to gain an edge for its banks, other countries would be fools to fall for it.