The European Union and the USA are dragging their feet agonisingly slowly when it comes to implementing new capital requirements. However, the snail race for the Basel III global banking package should finally gain momentum in 2024 - around 16 years after the global financial crisis culminated in the collapse of Lehman Brothers. On Tuesday, January 16th, the consultation phase on the proposals made by regulators around the Federal Reserve to design new capital and liquidity requirements will end in the United States. The cards will likely be reshuffled in the competition between financial centres worldwide.

The US banking industry has been up in arms against the plans of the Fed & Co. since the reform was presented in July. This is because the minimum value for the standard equity tier 1 capital ratios (CET1) of American bank holding companies is to increase by an aggregate of 16%. Banks with total assets of USD 100 billion or more will be affected, although institutions with assets of up to USD 250 billion may only face increases of 5%. Meanwhile, the largest and most complex banks are facing additional requirements of up to 20%. According to the EBA, Europe's banks only have to expect Tier 1 surcharges of 9% on average from 2028.

"The increase in capital requirements is completely unjustified," complains the Bank Policy Institute, the lobby group for the largest US financial institutions. The industry is extremely well capitalised by any credible measure and has weathered various real-life stress situations well, including the coronavirus crisis.

Other voices on Wall Street are criticising that the regulators around Fed Vice Chairman Michael Barr have allowed themselves to be put under pressure by the massive criticism of their institutions in the wake of the regional banking crisis in the spring and have extended the rule changes already initiated. The CEOs of the leading financial institutions in the United States took the same line both during the third quarter reporting season and during a Senate hearing at the beginning of December.

"The competitiveness of the US capital market will suffer", emphasised David Solomon, CEO of Goldman Sachs, in Congress. The plans of the US regulators go beyond the requirements of the Basel III standard, which central bank heads and supervisors agreed on in 2017. "The goal of every financial centre in the world is to take share from the US capital market," Solomon explained. Unfortunately, the US regulators had not given the industry the same flexibility in their Basel III plans as their European counterparts. As a result, companies will increasingly turn to European banks in future to obtain more favourable financing.

The Securities Industry and Financial Markets Association (SIFMA) also emphasises that credit costs will rise in almost all areas as a result of the new rules. This could have a resounding effect on the economy as a whole. The Bank Policy Institute even claims to have calculated that an increase in the prescribed complex core capital ratios of one percentage point would have a negative impact on gross domestic product of 16 basis points per year, which would correspond to an output loss of around 42 billion dollars per annum.

However, now that the snail race for the finalisation of Basel III, also known as "Basel IV", is finally gathering pace, it is not only the US banks that are feeling the pressure. While American financial institutions are complaining about the excessive harshness of the new regulations, European institutions are groaning under timetables that are allegedly too tight.

The banking associations in the European Union recently called for a deadline of at least 18 months for the implementation of Basel III, meaning that stricter capital requirements would not take effect before mid-2025. However, EU Commissioner for Financial Markets Mairead McGuinness insists that the new rules apply from January 2025. In the USA, on the other hand, the regulators' plans envisage the Basel III reforms coming into force in stages between July 2025 and 2028.

McGuinness counters critics from the European industry by saying that the European Parliament and the Council have provided the necessary flexibility to prevent competitive disadvantages - for example, in the application of regulations for market risks. The EU will also gradually introduce the so-called output floor, which limits deviations between internal calculations for capital requirements and the values specified by the standardised approach to credit risk, by 2030. Critics accuse Brussels of lagging behind the international framework with its plans for Basel III.

However, the US sector fears that tougher requirements will affect not only European competitors but also intermediaries without a deposit business. The investment firm Nomura expects America's banks to reduce risky assets even before the regulations are applied - these are likely to fall increasingly to non-banks that are sitting on high capital commitments. This also means that these more credit-sensitive assets will fall outside of regulatory control. Rating agencies such as Moody's are therefore warning of stability risks. After the snail's race around Basel III, there is, therefore, a risk that the market will be left with a trail of slime on which many participants could slip.