A senior executive at the Australian Treasury has defended the Basel III reform process. Jim Murphy, executive director of the market group at Treasury, said that re-working the rules into a simpler variant sounded "very attractive" to the industry and to some regulators. However, he said, there were two practical problems with taking this approach. "First, it is probably just simply too late to change course. Economies around the world are in the process of implementing the Basel III recommendations. Secondly, to open up Basel III to renegotiation will likely end in a stalemate. It is so difficult to get agreement in an international forum," Murphy told the Paul Woolley Centre's annual conference in Sydney last week.Aside from the practical considerations, Murphy also said there was a fundamental logic to the new rules. "Where there has been a lack of capital and liquidity in some financial institutions, it would seem a sound thing to increase the capital requirements and also liquidity," he said.While many banking systems around the world are struggling to meet Basel III, in Australia the debate has largely focused on the timing of its introduction, rather than the underlying motivations, Murphy said. "In Australia, we have seen the current debate [focusing] on the imposition of the new capital and liquidity requirements in the Australian banking sector. That debate has largely centred on the timing of the commencement."I think most people in the industry agree that there are benefits in terms of — in Australia's case — marginally increasing capital requirements. Also, the development of the new liquidity support mechanism from the [Reserve Bank of Australia] is very much supported by the institutions," Murphy said. He said this was partly driven by the recognition that Australian financial institutions rely heavily on offshore financial markets for funding. "For Australia, it is important that our financial institutions not only are well regulated but are seen to be well regulated by other countries. Historically, the banking system has relied on foreign funding to some extent and also on foreign equity. We need to make sure that we maintain an international reputation for sound economic management."Murphy argued that while "the adjustments that Australia has made... [for] an accelerated timetable for adopting the capital requirements has been debated… I think most people see that there is some sense in Australia as an economy which is [performing] quite well and is seen to be in producing these requirements earlier than the 2016 target date," Murphy said.Murphy also dismissed arguments that the new regime would prove excessively costly, pointing to recent research by the International Monetary Fund that average lending rates would increase by less than 30 basis points. "In terms of costs, I don't think that is the argument. But if you ever want to add greater safety margins, in terms of greater capital to financial systems, you have got to appreciate that it comes at a price," he said.A more realistic question was whether prescriptive rules of the type introduced by Basel III