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Asian financial leaders warned Europe on Tuesday to limit any delay in stricter banking rules to months not years, fearing the United States' decision to shelve the controversial new global regime could derail it completely.
Europe is preparing to follow the United States in postponing the introduction of the Basel III reforms, EU sources told Reuters, and the delay could last six months or even longer if diplomats and lawmakers fail to break the deadlock.
"The fact is that the U.S. and euro zone are the most important regions where Basel III should have been implemented," Anand Sinha, deputy governor of the Reserve Bank of India, told a Thomson Reuters Pan-Asian regulatory summit in Hong Kong.
"It would have been very helpful, even if there is a delay, if the U.S. and euro zone could have indicated a definite timeline, that is not there."
The global accord hatched by central bankers and regulators in the aftermath of the 2008 financial crisis demands that lenders set aside more capital to cover losses such as unpaid loans. It also lays out higher standards in determining what kind of assets a bank can use to meet these capital levels.
The rules, which triple the amount of basic capital banks need to hold, are meant to be phased in over a six-year period starting in January 2013.
While a delay would be good news for small banks seeking more time to adapt, investors dislike the uncertainty.
"It's not encouraging and it won't encourage investors," said Chris Wheeler, analyst with Mediobanca. "They just want it out of the way. They want the uncertainty buried."
The European Union is struggling to agree on many aspects of the package, including what kinds of assets can be considered liquid, or available at short notice.
Sinha warned that some emerging economies could use the European delay to argue that the new rules, designed to avoid future taxpayer bailouts, should not apply to them.
Banks in the Asia Pacific region will roll out the new rules on Jan. 1. Switzerland will also comply although its finance ministry said earlier this year that most Swiss lenders already hold enough high-quality capital to comply.
"The fact that other people aren't doing it doesn't mean that we can't," Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority, told the Thomson Reuters summit.
"In Europe it's a rather complicated process, but I do hope that the deferral of the implementation will only be in terms of months not years"
Speaking in Paris, Michel Barnier, the EU Commissioner who oversees financial regulation, said the bloc would start introducing the reforms next year, signalling a possible delay.
"I am awaiting a reply from the U.S. to a question I asked on the reason behind these few months' delay," Barnier told a news conference. "The bulk of the Basel III architecture will be put in place within the expected time frame."
Brussels is worried that Washington's decision to ignore the deadline will put EU banks at a disadvantage to U.S. rivals.
Barnier wrote to U.S. Federal Reserve Chairman Ben Bernanke asking when Washington will introduce the capital rules and flagging the risks if the United States and Europe take different tacks, people familiar with the matter told Reuters.
"The U.S. is dragging its feet which is not fair," one said.
But privately, many officials in Brussels concede that the same is likely to happen in the 27-member European Union and that the bloc will also be forced to delay implementation, marking a further setback in efforts to reform finance.
Many lenders already meet Basel's core capital buffer rules and the secretary general of the Basel Committee, which designed the accord, told Reuters a global system would still go ahead.
"Based on the position that the U.S and Europe have adopted, they are still saying they intend to do it. And the new requirements are relatively modest," Wayne Byres said on the sidelines of a financial sector conference in Abu Dhabi.
By standardising EU capital rules, the law would make it easier for the European Central Bank to supervise lenders, the first step towards a banking union - a cornerstone of closer fiscal integration in the euro single currency area.
"In practical terms, it seems to be impossible to do something that is implemented by January 1, but officially that hasn't been said," a senior lawmaker in the European Parliament said.
Banks have been pushing for a delay of the new rules until the beginning of 2014, arguing that the U.S. move would put them at a disadvantage.
After months of tortuous, often late-night negotiations between the parliament and EU member states, several issues relating to the new regime remain unresolved and agreement on the broader rules has yet to be reached.
The drawn-out process of signing off a law has frustrated regulators. "This is not a good situation," said one. "They are holding themselves up for ridicule if they don't adapt on time."