They must maintain safety without interrupting flow: enforce the rules without impeding competition. A mistake can cause a financial accident.
This month we examine two sets of financial regulators -- one in Europe, the other in South Korea -- who are struggling to get the signals right.
Start with Basel, Switzerland. Virtually every global banker agrees that banks’ capital adequacy guidelines need to be updated to reflect the new products, and risks, that have sprung up since the existing capital rules went into effect 15 years ago.
Trouble is, that’s where the consensus ends.
For the past five years, banking supervisors and industry leaders from Europe, Japan and North America have been regularly meeting in the mountain resort town to hammer out a new, risk-based system -- known as Basel II -- that aims to increase banks’ safety without tying up too much of their capital.
Now the Basel Committee, the project’s leaders, think that they’ve gotten the rules about right, and they want banks to endorse them by year-end; the accord is supposed to be implemented at the end of 2006. But skeptical bankers and even a few regulators say that Basel II is too complicated and, what’s more, may worsen economic swings. The anti-Baselites declare that banking’s new rules of the road need more testing before they’ll obey them.
The intensity of the disputes is a measure of what is at stake. “This will set the basic laws of competition for banks over the next generation,” explains European Editor Tom Buerkle, who has covered bank regulatory issues for nearly a decade and wrote this month’s cover story, “Basel Under Threat,” starting on page 24.
In Seoul, regulators face a balancing act. Five years of South Korean financial reforms are now threatened by a scandal at the conglomerate SK Group, a bond market liquidity crisis and a sudden change of fortune for the country’s once-thriving credit card business. The timing couldn’t be worse, says Contributor Donald Kirk in “Déjà Vu in South Korea” (page 39). With a sputtering economy and a nuclear threat to the north, new President Roh Moo Hyun doesn’t dare disrupt the financial system with major restrictions. Regulators will need a firm but deft touch to guard against further financial mishaps without slowing the economy to a crawl.
