Japan, Basel III and the pitfalls of being on time

Capital floor phase-in delay may be least-worst option for JFSA as US and Europe waver

The Japanese are renowned for the cultural emphasis they place upon punctuality. On the Shinkansen – or bullet train – network, delays are famously measured in seconds; disruptions longer than a few minutes can make national headlines. In business, too, being on time is not merely a matter of professional courtesy, it’s a fundamental mark of social respect.

In the world of macroprudential regulation, few are surprised that Japan’s regulator, the Financial Services Agency (JFSA), has done exactly what it agreed to, exactly when it said it would do it.

Japan has been among the first jurisdictions globally to complete its implementation of the post-crisis bank capital rules developed by the Basel Committee on Banking Supervision, known as Basel III. This includes enacting Basel’s new market risk capital framework, the Fundamental Review of the Trading Book (FRTB), which went live for Japanese megabanks in March last year.

Given the way implementation has played out elsewhere, some uncharacteristic tardiness on the part of the JFSA would have served Japan’s megabanks better.

50%

In Japan, the capital floor is set at 50% in the first year for each bank, with the bar rising 5% every year until hitting 72.5%

In the US, the implementation of the Basel III endgame framework is shrouded in uncertainty following Donald Trump’s return to the White House in January. The UK has opted to delay its implementation of the rules until January 2027. The European Union has already delayed FRTB once and is now mulling further changes to its rules and 2026 go-live schedule.

Other early adopters have begun to waver. Canada, another Basel III golden pupil that had stayed on schedule, will now defer future increases to the Basel III capital floor level as a temporary fix for the interjurisdictional disparity. The floor dictates how far the output of internal models can undershoot the regulator-set standardised approach. Canada will keep this locked at 67.5% for the foreseeable future – five points short of the 72.5% agreed by the Basel committee.

A similar delay in Japan could help ease a competitive disadvantage for the country’s banks. The JFSA capital floor is currently set at 50%, rising at 5% each year. 

Japan’s FSA says it will be sticking to its guns. A spokesperson for the regulator says it will implement the Basel III framework “in full, consistently, and as soon as possible.”

Some say the regulators’ hands may be tied.

Related

Japanese megabanks shun internal models as FRTB bites 

Barr’s Fed exit likely to delay, but not destroy, Basel III 

Delving into the European Commission’s proposed overhaul of FRTB 

“Changing the course now will also have resource implications for the JFSA since they will have to come up with regulation to modify the current regulation and they will also need to justify their position,” says a senior executive at a Japanese bank. 

“I think the JFSA has already decided to accept the timing gap when they made the decision on the Japanese implementation, so the rest is a matter of degree or time.”

Scott O’Malia, chief executive of the International Swaps and Derivatives Association, which has been lobbying for a softening in the US and European Union approach, says Basel III rules already implemented “will be hard to fix.”

“They might be revisited… but there’s not much we can do about those that have already settled,” he says.

What’s more, Japan’s megabanks have spent millions of dollars readying systems for Basel III and are understood to have already provisioned for future requirements.

For now, the regulator seems to be pinning its hopes on a sudden rush for the Basel III finish line by the US and other jurisdictions to limit the disparity.

Market participants don’t expect the gap to close any time soon and remain hopeful for some temporary regulatory finessing, at least while the global picture remains in flux.

“Many banks in Japan feel disadvantaged compared to the US, and the industry will want the regulator to take action,” another source at a Japanese bank told Risk.net.

There are no good options at JFSA’s disposal, but an indefinite postponement of the capital floor phase-in may be the only viable approach if it is to minimise the damage.

On a global markets playing field, at least, punctuality – while virtuous – is not always advantageous.

Editing by Helen Bartholomew