Today the Federal Reserve is expected to vote on revised capital regulations, widely known as the US version of Basel III, with the other agencies likely to follow suit. I am excited about this, in part because it brings back fond memories from November 2, 2007, the day the Basel II Final Rule was approved. Just as then, it is my hope that today’s new regulations will both strengthen individual institutions and reduce systemic risk. But this time around I am not waiting nervously outside the Board room and I was not involved in the writing of The Rule.
Although the exact details of the regulations should be released later today, there are unlikely to be any major surprises. For now, let me just mention two certainties:
- It is not going to be perfect. I know firsthand the challenges of rulemaking, trying to meet the varying needs of all constituents, as well as making sure that definitions and regulations are consistent with tax, legal, accounting, and other frameworks. Lack of perfection isn’t a bad thing. It is part of the policy process, a result of a lot of hard work that has gone in to trying to reach consensus on something that is incredibly complex and can apply to a diverse set of institutions.
- “Final” is a misnomer. The financial crisis occurred before the Basel II Final Rule could be implemented. But even prior to Basel II, its predecessor (now referred to as “Basel I”) was revised more than 20 times. In fact just six days ago the Basel Committee on Banking Supervision released a Consultative Document (Revised Basel III leverage ratio and disclosure requirements), suggesting the revision process has already begun.
I’m guessing that most Fed-watching market participants have been more focused on the exit-timing of quantitative easing than the timing of the Basel III Final Rule. But a cursory glance at the Fed’s website highlights nearly as many speeches (year-to-date) by Fed officials on the topic of banking regulation as on the economy or monetary policy. So it’s worth taking notice. Some important links to documentation leading up to today’s Basel III Final Rule are included below.
The Final Rule documents should be available via press release later today, as well as published in the Federal Register.
Notice of Proposed Rulemaking (issued June 7, 2012).
Bank for International Settlements Basel III documents