LITERAL p)

Given the decision by Basel III’s designers in favour of taxation and against prohibition, the full potential of Basel III can be achieved only if G20 and FSB member countries and regions work within the global process and fully implement the minimum standards (Walter, 2011). Consistent implementation of the new minimums is essential if the global harmonisation of the new standards is to be a success. Firms should be unable to avoid the regulations that should ideally be nondiscretionary and clearly enforced (Rajan, 2010). The medium-to-long- term efficacy of Basel III, and by extension the strength of this main facet of the paradigm shift, depends on monitoring implementation and on national enforcement of the new regulations so as to minimise regulatory arbitrage opportunities.

Leaders inside the FSB understand the importance of monitoring and reporting of

implementation, and as a result the process they have put in place is new and stronger than previously. Historically, BCBS did not make judgments on national compliance with past accords. There could be harping and soto voce complaints but no compliance action or up-

front naming and shaming of fellow regulators. The pre-crisis process was informal, less institutionalized, and tended to rely on discussions in which supervisors avoided placing direct blame for failures on their counterparts elsewhere. Not anymore. Now, post-crisis, the FSB and the BCBS below it are engaged in a potentially meaningful reporting and

compliance process, making judgments on national regulatory actions, pro or con. This is a significant change, according to observers and participants (Interview 34, 2013).

To achieve this, the FSB and BCBS have constructed a three-tier reporting process: level one, timeliness of adoption; level two, regulatory consistency observed; and level three, ensuring consistency of outcomes. The process of oversight is being paid for by the BIS (Interview 34, 2012). The reporting, country-by-country, is sent directly via the FSB to the G20 summits on a semiannual basis. This process is qualitatively different from past practice and is more meaningful. Pressure to apply the consistent standards is seen. Thus, the FSB October 2012 compliance report took direct aim at failures in consistency in implementation in the EU, the U.S., and Japan (BIS, 2012), pressing for changes on all sides. These judgments are public. This arguably places greater pressure on the miscreants to improve their implementation and compliance. It also empowers the regulators themselves against domestic opponents, because the former can use complaints from the FSB to strengthen their position against the latter.

This form of detailed monitoring—of naming and shaming of those states that do not, in the Committee’s judgment, measure up—is ‘unprecedented’ (Interview 27, 2011, p. 13). It has never been done before by the BCBS. This underscores the commitment of the central

banking community to make the accord work and is echoed by the uncompromising language on implementation used by the principals, such as Stefan Ingves, Chair of the BCBS, and Mark Carney, Chair of the FSB.

This is policy paradigm implementation and maintenance in action. The leaders of the FSB and BCBS who agreed the accord fashioned a new compliance and monitoring process that is better than the previous nonjudgmental, weaker reporting regime. The FSB leaders know implementation matters. A refusal to judge others’ failures is no longer an option. Clearer judgments in the G20 reporting process ensures not only the naming and shaming of laggards, but also moves towards the gradual establishment of norms and customs of adherence and, ultimately, potentially stronger compliance with the rules over time, which through repeated reporting may become widely understood and better applied.

mechanisms. This more rigorous reporting and compliance structure is also evidence of the strength of the FSB-BCBS expert epistemic community, its policy consensus, and its ability to bind and press its own membership in a way not seen in other policy areas. The community is holding itself to norms it agreed and via mechanisms it controls. Failures will be regularly reported upwards to the G20 summits.

Placement in the reform matrix: The Basel III Accord is the most significant policy reform initiated by the G20 and FSB designed to re-regulate the international financial system and the banking sector. It was driven by the leading epistemic transnational expert community, which itself directs the FSB reform process. This community created pledges and constructed monitoring and compliance processes. Once fully implemented, the accord may result in the FSB overseeing nationally enforced binding standards. Compared to previous accords, the new accord is more robust and could be potentially more effective in enhancing financial stability and mitigating systemic risk.

Given the relative strength of the Basel III Accord, with seven to over 10 times the previous core capital levels, its wider base in terms of coverage; and its multiple other facets, tools, and new compliance processes; the accord is pictured on the matrix as moving from ‘very weak’ to ‘strong’ and above ‘weakly globally harmonised’, from left to right and upwards across the policy matrix landscape. The policy shift is the most dramatic of any areas tackled by the G20 advised by the central banking community, and constitutes a third-order change and paradigm shift in technical financial regulatory policy.