LONDON U.S. pressure to toughen up how banks set aside capital suggests reform of Basel II rules on capital adequacy could be drawn out for years, leaving banks in the lurch.
American banks have yet to fully implement the rules and some officials see the crisis as a chance for radical reform but resistance is likely from Europe, which has firmly nailed its mast to an accord that was a painful decade in the making.
U.S. Treasury Secretary, Timothy Geithner, said on Wednesday he will set out principles at this weekend's meeting of G20 finance ministers in London for a new global accord to constrain bank leverage and eventually supplant Basel II.
Policymakers say Basel II amplifies crises by forcing banks to top up capital in downturns, a criticism members of the Basel Committee on Banking Supervision that drafted the rules reject.
G20 leaders said in April the rules needed reforming and the Basel Committee is speeding up work on changes, some of which were in the pipeline before the crisis.
It published a batch of draft amendments in July, with further draft reforms to come later this year.
"Geithner is suggesting that more needs to be done because otherwise he could say he was in full support of the Basel Committee proposal," said Harald Benink, professor of banking and finance at Tilburg University in the Netherlands.
"Now it's like Basel II with refinements when we need to go much more to a Basel III. We need to tackle the more fundamental question of what is the appropriate level of capital in the banking system," Benink said.
The British Bankers Association said calls for a new capital accord are completely unjustified and would bump up costs for banks, making it harder to serve customers and economies.
"Let us be under no illusion that the conditions giving rise to the recent financial turmoil were stoked up in a Basel 1 environment in the U.S.," said Simon Hills, a BBA executive director.
"America has still to implement Basel II, which is far more risk sensitive, and although they were operating a leverage ratio for many years this doesn't seem to have prevented more than 400 U.S. banks being on the Federal Deposit Insurance Corporation's problem list right now," Hills said.
The United States and other countries want to ensure that in the next crisis taxpayers won't have to fork out trillions of dollars to shore up undercapitalized banks again.
Basel II defines what can be counted as capital and sets minimum acceptable ratios for regulatory capital to risk weighted assets.
Geithner said the principles would be developed by the Financial Stability Board of central bankers, regulators and finance ministry officials from the G20 countries, rather than the Basel Committee, which had no comment on Thursday.
The U.S. Federal Reserve has supported Basel II, with one of its then members, William McDonough of the New York Fed, chairing the Basel Committee when it drew up the rules.
Some lawmakers, academics and regulators are openly hostile.
"Basel, in my view, was a total failure. None of the Basel changes will lead to the right result. What we learnt from the crisis is that simple leverage ratios prevented more damage from being done than Basel was doing," said Hal Scott, a professor of international finance at Harvard Law School.
The FDIC, a U.S. banking regulator, has suggested that implementing Basel II in full and ditching the leverage ratio in force would lead to reductions in capital and fewer safeguards.
Geithner will face resistance from the EU to wholesale reform of Basel II as it adopted them into law early and has criticized the United States for being slow to follow suit.
"I don't think Europe will launch itself into tearing up Basel II. They have a much stronger vested interest in preserving and modifying rather than tearing it down," said Michael McKee, a partner at DLA Piper lawfirm.
The EU is, however, making some changes but there is no sign of an appetite in Europe for radical reform.
"Basel III? No way," Jose Maria Roldan, the Spanish chairman of the Basel Committee's standards implementation group said in June. "Our priority is that we strengthen Basel II and make sure it's truly implemented."
A source familiar with the Basel Committee say the body was making many changes, such as including a leverage ratio, beefing up capital rules on trading books, improving the quality of capital, and requiring banks to build up capital in good times.
"Whatever label you put on something, you should focus on the substance of what is being done and it is being coordinated fully through the FSB process and people are singing from the same hymnbook," the source said.
The source added that full implementation of Basel II would have highlighted loopholes in the shadow banking sector that came to light and there was no evidence the rules drove up capital requirements for banks.
BBA's Hills said even the incremental changes planned, such as adding a leverage ratio, needed thinking through, saying it failed to stop problems in the United States.
"But there is every chance that logic will not prevail and we will face a leverage ratio - so what we should be seeking is one that acts as a backstop if required to a capital regime that focuses on the real risks banks face. In a nutshell 'if the risk weight is right, the leverage ratio won't bite'," Hills said.
Bankers also worry there will be a repeat of the decade of horsetrading it took to thrash out Basel II so that France, Germany and United States agreed on what constitutes capital.
"There are still only 168 hours in a week so I am not clear why a new institutional initiative is a good use of scarce senior management resources at the global level," a London based banking official said.
The G20 meeting will be just the start of a long process.
"I doubt very much in the G20 context that anybody will be signing up to say they accept Geithner's proposals lock, stock and barrel. It's more of the U.S. putting their cards on the table and influencing the discussion," McKee said.
(Reporting by Huw Jones, editing by Andy Bruce)