U.S. turns up heat on Basel bank reform
U.S. pressure to toughen up how banks set aside capital suggests reform of Basel II rules on capital adequacy could be drawn out for years, leaving banks in the lurch.
American banks have yet to fully implement the rules and some officials see the crisis as a chance for radical reform but resistance is likely from Europe, which has firmly nailed its mast to an accord that was a painful decade in the making.
U.S. Treasury Secretary, Timothy Geithner, said on Wednesday he will set out principles at this weekend’s meeting of G20 finance ministers in London for a new global accord to constrain bank leverage and eventually supplant Basel II.
Policymakers say Basel II amplifies crises by forcing banks to top up capital in downturns, a criticism members of the Basel Committee on Banking Supervision that drafted the rules reject.
G20 leaders said in April the rules needed reforming and the Basel Committee is speeding up work on changes, some of which were in the pipeline before the crisis.
It published a batch of draft amendments in July, with further draft reforms to come later this year.
“Geithner is suggesting that more needs to be done because otherwise he could say he was in full support of the Basel Committee proposal,” said Harald Benink, professor of banking and finance at Tilburg University in the Netherlands.
“Now it’s like Basel II with refinements when we need to go much more to a Basel III. We need to tackle the more fundamental question of what is the appropriate level of capital in the banking system,” Benink said free business cards.
The British Bankers Association said calls for a new capital accord are completely unjustified and would bump up costs for banks, making it harder to serve customers and economies.
“Let us be under no illusion that the conditions giving rise to the recent financial turmoil were stoked up in a Basel 1 environment in the U.S.,” said Simon Hills, a BBA executive director.
“America has still to implement Basel II, which is far more risk sensitive, and although they were operating a leverage ratio for many years this doesn’t seem to have prevented more than 400 U.S. banks being on the Federal Deposit Insurance Corporation’s problem list right now,” Hills said.
The United States and other countries want to ensure that in the next crisis taxpayers won’t have to fork out trillions of dollars to shore up undercapitalized banks again.
Basel II defines what can be counted as capital and sets minimum acceptable ratios for regulatory capital to risk weighted assets.
Geithner said the principles would be developed by the Financial Stability Board of central bankers, regulators and finance ministry officials from the G20 countries, rather than the Basel Committee, which had no comment on Thursday.
The U.S. Federal Reserve has supported Basel II, with one of its then members, William McDonough of the New York Fed, chairing the Basel Committee when it drew up the rules.