The meaning of Basel: Cohen, Spillenkothen, Stiglitz speak out

By Christine Harper
(c) 2010 Bloomberg News
Sunday, September 12, 2010; 10:48 PM

The Basel financial regulators' decision to more than double bank capital requirements worldwide -- while allowing eight years to comply -- triggered conflicting responses among experts ranging from Nobel laureate Joseph E. Stiglitz to Wall Street lawyer H. Rodgin Cohen.

Stiglitz, 67, said the "unconscionable" delay will expose the public to risk, while Cohen, 66, predicted the market may "penalize immediately" lenders that currently fall short. Paul Miller, 49, a former bank examiner who is now an analyst at FBR Capital Markets Corp., called the new rules "easy" and predicted they won't prompt capital-raising by any big U.S. firms.

Following are comments from Stiglitz, a professor at Columbia University in New York; Cohen, the senior chairman of Sullivan & Cromwell LLP, also in New York; Miller, in Arlington, Virginia; Simon Johnson, 47, a former International Monetary Fund chief economist and now a professor at the Massachusetts Institute of Technology's Sloan School of Management, in Cambridge; and Richard Spillenkothen, a former head of banking and supervision at the Federal Reserve Board and ex-member of the Basel panel, now a director at Deloitte & Touche in New York. All spoke in phone interviews yesterday.

They reacted to an announcement yesterday from the Basel Committee on Banking Supervision, which said it will require lenders to maintain common equity equal to at least 7 percent of their assets, weighted according to risk, including a 2.5 percent buffer to withstand future stress. Banks have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements. Definitions of what counts as capital and how risk is assessed were tightened.

H. Rodgin Cohen

"The real question is whether the BIS will be right and that the market won't penalize immediately the institutions that fall short of the requirements," he said, referring to the Bank for International Settlements.

An example is the treatment of mortgage-servicing rights. "If they will be difficult to hold because of an extraordinary capital charge in the future, does that mean banks will be less willing to originate and hold and sell mortgage-servicing rights? It's just astonishing to me that you would give zero value to a fundamental element of the mortgage business."

"Worse than any rule is uncertainty. The fact that the surcharge for systemically important institutions remains undealt with continues to create that uncertainty."

During the past 10 years, the largest U.S. banks have maintained an average voluntary capital cushion of about 170 basis points, or 1.7 percentage points, over the minimum requirement, he said. The question is whether firms will maintain that amount over the capital conservation buffer.

"There's even more of a need to maintain this voluntary cushion than there was in the past" because of mark-to-market accounting requirements. A 1 percent buffer applied to the U.S. banking system equates to $140 billion in capital, he said.

"One can argue that this is very negative in relative terms for the U.S. banks because many of the deductions are uniquely a U.S. problem and make a huge difference," he said, citing mortgage-servicing rights and deferred tax assets in particular.

Under new definitions, he estimates Tier 1 common equity ratios for U.S. banks drop to 4 percent from 6.5 percent, mainly because of changes in the definition of capital. There will be some changes in asset risk weighting as well, he said.

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