Mr. Hildebrand, the president of the Swiss central bank, was called “arrogant” and “egotistical” by bankers quoted anonymously in the pages of Swiss newspapers. His supposed sin: Wanting banks to hold extra capital. The fact that Mr. Hildebrand was himself a former hedge fund manager in New York seemed only to heighten the sense that he had betrayed his profession.
“He’ll never find another job in Switzerland,” the Swiss newspaper Der Sonntag quoted an unnamed high-ranking banker as threatening Mr. Hildebrand in 2010.
The unusually bitter attacks on a central bank chief were a measure of what was at stake. Mr. Hildebrand, 48, had a high-visibility role in a struggle between bankers trying to preserve their most lucrative business practices and regulators trying to defuse a system that, many believe, nearly blew up the world economy.
“Many of us on the public side had to deal with industry push-back, at times amplified by public coverage,” Mr. Hildebrand said. “One lesson that emerges is that the capacity of the financial industry to lobby for its short-term interests is far reaching.”
The debate centers on an international accord that most people outside the industry have never heard of, the so-called Basel III rules. The core issue and main point of dispute is capital — the money that banks accumulate through issuing stock and holding onto profits, money that they do not have to repay. The regulators want banks to finance their operations with more capital and less borrowed money. Advocates argue that the bigger the capital buffer, the greater the stability of the financial system. But financing operations from capital, rather than borrowing money, is less profitable, and that means lower bonuses.
“In the financial crisis the banks got the upside and the public got the downside,” said Stephen G. Cecchetti, head of the monetary and economic department of the Bank for International Settlements, in Basel, Switzerland. The bank houses the Basel Committee on Banking Supervision, the secretive panel that establishes global banking standards. “We want to make sure that doesn’t happen again.”
After some fierce battles, proponents of the tighter rules have achieved some success in pushing through measures that will force banks to reduce risk. The Federal Reserve on Tuesday published draft regulations that draw heavily on the agreements reached in Basel. But there is a long phase-in period that the banking industry could use to try to water down the rules. And many economists fear that the new regulatory regime still allows banks to take outsize risks.
Flaws in earlier Basel rules, known as Basel II, allowed the financial crisis to gather in the first place, many economists say, enabling the illusion that banks were comfortably cushioned against risk. In fact, the banks had badly underestimated the malignant potential of their holdings. Faulty regulation also worsened the European sovereign debt crisis, assigning government bonds virtually zero risk. That encouraged banks to extend billions in credit to countries like Greece and Italy, setting up a dangerous correlation between the solvency of countries and the health of banks. The thinking, in effect, was “Why imprison capital to insure against losses that were unlikely ever to happen?”
The technical term was “risk weighted assets.” It was as if a homeowner only had to make a down payment on the part of a house that might catch fire. Other parts of the property, like the swimming pool and the lawn, would not count.
The flaws in this model became obvious in the days after investment bank Lehman Brothers collapsed in 2008. Banks that appeared to be well capitalized discovered that they had hugely underestimated risk. Derivatives tied to the United States real estate market, with top credit ratings, suddenly became impossible to sell and effectively worthless.
One of the most vivid examples was right around the corner from Mr. Hildebrand’s office in Zurich, the Swiss bank UBS. In the years before the crisis, UBS was, on paper, one of the best capitalized banks in the world. But in the course of 2008 UBS rapidly depleted its cushion as it absorbed losses from investments in the American real estate market.
Article source: http://feeds.nytimes.com/click.phdo?i=315a259c5d3e0adb4fd28cadaf4e81f2
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