EUROPE – The Basel Committee's recent decision to soften capital requirement rules for banking institutions is unlikely to soften the hearts of European regulators on other issues, a number of pension experts have warned.
For many industry experts, the launch of a softer version of the Basel III framework simply represents a tacit recognition by supervisors that stricter capital requirement rules could have unintended consequences for the global economy.
The revision of the previous Basell III proposals includes an extension of eligible assets held by banks to count in their liquidity buffers. A less severe calibration for certain cash flows and a phasing-in arrangement from January 2015 to 2019 are also planned.
According to Michel Barnier, commissioner for internal market and services at the European Commission, the treatment of liquidity is fundamental, both for the stability of banks as well as for their role in supporting wider economic recovery.
"I welcome the unanimous agreement reached by the Basel Committee on the revised liquidity coverage ratio and the gradual approach for its phasing-in by clearly defined dates," he said.
Dave Roberts, senior consultant at Towers Watson, largely concurred.
"The key message is perhaps the implicit recognition the regulatory system must not be allowed to disrupt an economic recovery," he said. "This is clearly welcomed as a positive indicator."
However, Roberts also argued that this weekend's agreement to soften the liquidity coverage ratio under Basel III, in and of itself, was unlikely to offer much comfort to those with similar concerns around IORP II.
James Walsh, senior policy adviser at the National Association of Pension Funds (NAPF), added that there was no immediate connection between the Basel III regime and the new IORP Directive, as different institutions had set the respective rules.
"However," he said, "it is interesting to see here what happened with Basel III, and it may be that, in due course, some of the capital requirement rules within the revised IORP Directive will prove difficult to introduce".
Pension representatives also stressed that the only link between Solvency II – and, ultimately, the revised IORP Directive – and the regulatory framework for banks was based on the structure set by the Basel II regulation, which is still in use until Basel III is implemented.
As with Basel II, the Solvency II structure organises capital requirements under the first pillar, governance and supervision under the second pillar and disclosure and transparency under the third pillar.
Paul Sweeting, European head of strategy at JP Morgan Asset Management, pointed out that the change in regulation between Basel II and Basel III dealt with issues that were all very specific to banks but not so much to insurance companies.
"The way in which banks typically work is that they rely much more on shorter-term funding. This means that funding liquidity and short-term access to capital markets is more important for banks," he said.
"In comparison, insurance companies are much more likely to use long-term financing and are not so much subject to the risk of reduced access to capital markets as banks would be."
Additionally, even though Basel III may indirectly influence IORP II via the Solvency II regime, it is the longer-term capital adequacy requirements rather than liquidity that are of concern to pension funds.
Pete Drewienkiewicz, head of manager research at Redington, pointed out that each of the institutions mentioned had very different objectives and constraints, and that what was appropriate for one entity would not necessarily be appropriate for another.
"Pension schemes and insurers have a very different liability profile to other financial institutions, and, hence, there is less focus within Solvency II on liquidity and more on the type of underlying assets held by institutions," he said.