April 1, 2023

DealBook: Global Rule Maker Defends Regulatory Efforts From Criticism

Stefan Ingves, the chairman of the Basel Committee on Banking Supervision and governor of the Riksbank, the Swedish central bank.Bertil Ericson/Scanpix, via Associated PressStefan Ingves, the chairman of the Basel Committee on Banking Supervision and governor of the Riksbank, the Swedish central bank.

DAVOS, Switzerland — The head of a panel that writes the global financial rulebook answered criticism that the so-called Basel Committee has gone soft on banks, arguing that lenders need more time to adjust to new regulations because the financial crisis has lasted longer than anyone expected.

Stefan Ingves, the chairman of the Basel Committee on Banking Supervision, was responding to some economists and other critics who interpreted a recent decision by the committee as a signal that regulators were losing their resolve to contain risk-taking by banks.

Earlier this month, the committee decided to give banks got more time to comply with a requirement that they maintain a 30-day supply of cash other assets that are easy to sell. The rule is supposed to make banks better able to survive a financial crisis like the one that occurred after Lehman Brothers collapsed in 2008.

When regulators drafted the rule in 2010, they did not expect the crisis to last so long and for banks to still be in such a weakened state, said Mr. Ingves, who is also governor of the Riksbank, the Swedish central bank. The important thing is that there is a rule at all, he said.

World Economic Forum in Davos
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“The Basel Committee has been discussing liquidity in different forms for 30 years,” Mr. Ingves said in an interview on Friday here at the World Economic Forum. “To get to a point where a global liquidity standard has been established is an achievement in itself.”

Banks will have until 2019 to fully comply with the requirement, instead of 2015 as originally planned. The rule will still achieve its purpose of making banks safer, Mr. Ingves said.

“If there’s stress in the system, a bank shouldn’t run out of money,” Mr. Ingves said. “It should take longer than the last time before you need to go to the central bank. It’s buying insurance within the private sector itself.”

The loosening of the rule this month raised concerns that members of the Basel Committee, whose decisions serve as a benchmark for national regulators around the world, would also become more lenient on other issues as they conduct a comprehensive overhaul of banking rules.

The Basel Committee also expanded the definition of liquid assets to include even securities backed by home mortgages, one of the financial instruments that helped case the crisis. Mr. Ingves pointed out that the rules contain safeguards to ensure that banks only use high-quality mortgage-backed securities.

Following the initial outcry about changes in the rules, some other leading economists have welcomed the decision, saying it simply acknowledges the need to balance stricter oversight with the need to make sure credit keeps flowing.

There was a danger that banks in western Europe would curtail lending in eastern Europe even more severely than they already have, said Erik Berglof, chief economist of the European Bank for Reconstruction and Development. The development bank, partly owned by the United States as well as European countries, supplies credit to the former Soviet Bloc countries as well as newly democratic countries in the Middle East.

The decision by the Basel Committee this month “was a good thing,” Mr. Berglof said in an interview. “It was particularly good for emerging markets.” In eastern Europe and many developing regions, most banks are foreign owned and dependent on their parent banks for financing.

The Basel Committee’s decisions are not binding and must be put into force by individual countries. The United States has agreed to the rules, but has come under criticism for being too slow to implement them and not sticking to the agreed blueprint. American officials point out that big banks in the country are healthier and already comply with the Basel rules that have yet to take effect.

Mr. Ingves was diplomatic when asked about the United States implementation, pointing out that the European Union is also taking longer to agree on how to apply the rules.

“They are a bit behind schedule but work is being done,” he said. “Both have said they will get this done. I have no doubt they will.”

At the World Economic Forum, the central issue is probably whether the euro zone crisis has reached a turning point. Mr. Ingves, a former official at the International Monetary Fund with decades of experiences in banking crises, was fairly optimistic.

“You never know, but it looks like it,” he said.

Article source: http://dealbook.nytimes.com/2013/01/25/amid-criticism-global-rule-maker-defends-regulatory-efforts/?partner=rss&emc=rss

Banks Win an Easing of Asset Rules

The rules are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008. Meeting in Basel, Switzerland, the committee, made up of bank regulators from 26 countries, also loosened the definition of liquid assets.

The decision marks the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010. The easing takes some pressure off banks, which have complained that the new guidelines would throttle lending and hurt economic growth.

Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. “Nobody set out to make it stronger or weaker,” he said of the rules in a conference call with reporters, “but to make it more realistic.”

Still, the decision was a public concession from the authors of the so-called Basel III rules that the regulations could hurt growth if applied too rigorously. It was endorsed unanimously by participants, including Ben S. Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank.

The rules were drafted by the Basel Committee on Banking Supervision, named after the Swiss city where many of the discussions have taken place. The Basel rules are not binding on individual countries, but there is substantial international pressure for countries to comply.

Much of the debate so far has focused on increasing the amount of capital that banks hold in reserve to absorb losses. After Lehman’s collapse, trust among financial institutions evaporated and banks refused to lend to one another. Many banks discovered that they did not have enough cash or readily salable assets to meet short-term obligations. In some cases, banks that were otherwise solvent faced collapse.

The rules require banks to have enough cash or liquid assets on hand to survive a 30-day crisis, like a run on deposits or a credit rating downgrade. They will not take full effect on Jan. 1, 2015, as originally planned, but will be phased in more gradually and not take full effect until Jan. 1, 2019.

This so-called liquidity coverage ratio also defines what qualifies as liquid assets: the assets cannot be already pledged as collateral, for example, and they must be under the control of a bank’s central treasury, so it can act quickly to raise cash if needed.

On Sunday the central bankers and regulators broadened the definition of liquid assets. For example, banks will be allowed to use securities backed by mortgages to meet a portion of the requirement.

A large majority of big banks already meet the requirements, but some do not, Mr. King said. The decision reduces pressure on those banks to hold more cash or buy high-quality government bonds to meet the rules on liquid assets.

The panel said it was continuing to discuss another set of regulations aimed at preventing banks from becoming overly dependent on short-term funds. But it did not announce any new decisions Sunday.

Before the Lehman bankruptcy, some institutions made long-term loans using money borrowed for very short periods. The practice is a normal part of banking, but it can, if carried to extremes, make a bank vulnerable to market disruptions.

Depfa, an Irish bank owned by Hypo Real Estate of Germany, issued long-term loans to governments using money it borrowed in short-term money markets. The bank made a profit from the difference between what it could charge for the long-term loans and what it paid to borrow short term. But after Lehman collapsed, Depfa was no longer able to roll over its obligations by borrowing on international money markets. Its parent company required a taxpayer bailout to survive.

The new rules seek to ensure that banks have a variety of fund sources and are not overly dependent on one market or lender.

Although the Basel Committee drafts global banking rules, it is up to individual countries to write them into law. The United States has lagged countries including China, India and Saudi Arabia in putting the rules into force, according to an assessment by the Basel Committee in September. The American delay has led to some grumbling from other members.

Bank industry representatives have argued that stricter capital and liquidity requirements increase banks’ financing costs, which they must pass on to customers. One of the most vocal critics of the new regulations is the Institute of International Finance in Washington, whose members include many large American and European banks, including Goldman Sachs, Morgan Stanley and Deutsche Bank.

In October, the institute issued a report arguing that the rules would make banks less willing to issue longer-term loans or hold debt issued by smaller companies, whose bonds usually have lower credit ratings. The rules would also penalize banks in emerging countries, the institute said, because they have less access to low-risk assets.

Proponents of the new rules argue that banks will be able to raise money more cheaply if they are perceived as being less vulnerable, thus offsetting the cost of the new rules. They point out that American banks have generally recovered from the crisis more quickly than European banks because United States regulators forced them to raise new capital.

Article source: http://www.nytimes.com/2013/01/07/business/global/07iht-banks07.html?partner=rss&emc=rss

DealBook: Fed Wants U.S. Banks to Adhere to Stiffer International Rules

The Federal Reserve proposed on Thursday that the country’s banks adopt a broad package of international regulations aimed at making the global financial system more resilient to shocks.

The proposal, drafted by a group of central banks and national bank regulators, would require banks to hold sturdier buffers against losses. The Basel Committee on Banking Supervision devised the rules, known as Basel III, after the 2008 financial crisis revealed the frailty of global banks.

“It is a faithful implementation of the global agreement,” said Stefan Walter, a principal at Ernst Young, and a former secretary-general of the Basel committee. “This is a major step forward.”

The proposal focuses on capital, which banks must hold to protect themselves against potential losses. The critical requirement compares Tier 1 common capital with a measure of a bank’s assets. Thursday’s proposal would require Tier 1 common capital that amounted to 7 percent of assets by the end of 2018, when the phase-in period for the regulations would end. The Fed’s proposed rules will be open to public comment for 90 days.

Many of the requirements have been known for months, and the banks are already fortifying their balance sheets in preparation. For instance, Citigroup, which was severely undercapitalized when it entered the financial crisis, said it had an estimated Basel III ratio of 7.2 percent at the end of March. JPMorgan Chase, under scrutiny because of a multibillion-dollar loss in a derivatives trade, has not publicly disclosed its current estimated Basel III ratio.

The largest global banks are likely to be required to have capital levels higher than 7 percent. Regulators are expected to demand that the largest banks hold extra capital to reflect the risk their size presents to the financial system. Such banks might be need as much as 2.5 percentage points of additional capital, bringing the total to 9.5 percent.

Despite the stricter requirements, the Federal Reserve would allow many banks to pay out their capital in the form of dividends and share buybacks. A Federal Reserve official said that recent bank stress tests took into account whether the banks could still meet minimum, interim Basel III requirements after paying out capital. The banks will have more than six years to fully comply with the new rules, with the phase-in period starting next year.

The Basel III standards have plenty of critics. Some bankers say they are overly burdensome, arguing that even a slow introduction could crimp lending.

Under Basel III, banks would have to hold more capital against certain types of mortgages, which could deter banks from making home loans. A Federal Reserve official responded that the Basel III rules were intended to give banks incentives to write sound mortgages, not hamper lending.

Some analysts say they think the rules are too weak and could lead to dangerous unintended consequences.

Through a practice known as risk-weighting, Basel III allows banks to hold less capital against assets that the rule makers assume are less risky, like government bonds. The European sovereign debt crisis shows the potential danger of this approach.

“When you give something a low risk-weight, that’s where the risk tends to build,” said Anat R. Admati, professor of finance and economics at Stanford University.

Article source: http://dealbook.nytimes.com/2012/06/07/the-fed-proposes-stronger-buffers-for-banks/?partner=rss&emc=rss