The United States should reject Basel III bank capital standards if the international panel that drafted them does not make dramatic changes to the rules, a director at the U.S. Federal Deposit Insurance Corp. said on Friday.
Speaking at the American Banker regulatory symposium, FDIC director Thomas Hoenig said the current standards deserve a total rethink because they are too complex and are based on subjective judgment calls.
“I believe the Committee should agree to delay implementation and revisit the proposal. Absent that, the United States should not implement Basel III, but reject the Basel approach to capital and go back to the basics,” said Hoenig, who joined the FDIC board in April after retiring as president of the Federal Reserve Bank of Kansas City.
The FDIC is an independent agency that insures U.S. deposits and oversees some banks.
Basel III will be phased in over six years starting in January and will force banks to hold roughly three times more basic capital than under the current Basel II accord. The biggest banks will have to hold even more.
Hoenig said Basel III “continues an experiment that has lasted too long” and added that the “enormously complicated” new rules would open the door to malfeasance.
“If you add 400 more rules, or 400 equations, that is 400 more ways to game the system,” he said.
Banks across the globe have supported boosting capital requirements following the financial crisis.
They have complained, however, about the particulars of the Basel III agreement. The largest institutions have said it goes too far in forcing financial giants to hold extra capital buffers, while community banks have said the base framework does not work for the type of assets they hold.
“Director Hoenig is expressing what thousands of bankers have also recognized: That applying the international Basel standardized capital rules to all banks, in a one-size-fits-all manner, is a bad fit for most if not all U.S. banks,” said Wayne Abernathy, an executive vice president at the American Bankers Association.
Ed Mills, an analyst at FBR Capital Markets, said Hoenig’s comments come as community banks gain momentum in their fight against coming under all of the pending Basel III rules.
Community banks, Mills noted, effectively blocked the full implementation in the United States of earlier Basel II requirements and could be a threat to Basel III.
“A lot of larger institutions are probably quietly cheering on Hoenig and the community banks,” said Mills.
A DIFFERENT APPROACH
Hoenig proposed an alternative way of checking whether a bank has enough capital – a tangible equity to tangible asset ratio. He said it would be a simpler, more objective measure that would better reflect a bank’s ability to absorb loss in good times and in times of crisis.
Still, Hoenig acknowledged it was unlikely for the U.S. to all-out reject the Basel rules.
Hoenig is the second senior regulator to call for a rethink of the world’s core regulatory response to the financial crisis that saw taxpayer bailouts of banks on both sides of the Atlantic.
Bank of England director of financial stability Andrew Haldane called for a rethinking of Basel in August, saying it may be too complex to work properly.
The Basel Committee is already facing pushback from several regulators as well as banks on one of its core rules that will force banks, starting in 2015, to build up a buffer of liquid assets to withstand a month-long market shock without help.
The Basel committee met in Istanbul this week, but failed to reach a deal on how far to scale back the rule that banks say will crimp lending in the current tough economic conditions.
PRIVATE EQUITY INVESTMENT
Hoenig also touched on the thorny issue of whether private equity firms should be allowed to invest in banks, a debate that heated up during the financial crisis.
“I am very open to having private equity come into banks if it is private equity to invest in commercial banking,” he said.
In 2010, the FDIC imposed rules on private equity groups, including large capital requirements to ensure strong funding and a long-term commitment, and to weed out investors looking to make a quick profit on troubled banks.
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