Global bank rules expected to be 'minimum' standard, Basel group says
Wednesday, October 20, 2010; 5:03 PM
Investors around the world are likely to regard new banking rules proposed by an international group of central bankers as a "minimum" standard and will probably force banks to set aside even more capital than required as a buffer against losses, according to one of the regulations' main authors.
"Banks and their investors will want more," said Stephen Cecchetti, an economist working with the Basel Committee on Banking Supervision, which has been writing new rules for the global financial industry. "A prudent manager together with shareholders would surely want the bank to have their own discretionary margin" beyond the regulatory standards.
The committee, based in Basel, Switzerland, wants governments to roughly triple the amount of capital banks set aside, to an amount equal to 7.5 percent of their deposits and other liabilities. That requirement and other measures proposed by the committee will be reviewed by finance ministers of the G-20 group of nations when they meet in South Korea this week and is expected to be endorsed by G-20 heads of state at a summit next month.
Cecchetti, the committee's chief staff member and head of the Monetary and Economic Department at the Basel-based Bank for International Settlements, said in a recent interview that he expects that national regulators could also force banks to boost capital levels beyond the minimum standard proposed in Basel. Swiss regulators, for example, have already upped the capital requirement for their biggest banks to 10 percent, recognizing that a crisis at financial giants UBS or Credit Suisse could overwhelm the government's ability to respond.
U.S. officials plan to integrate the Basel proposals into the financial regulations approved earlier this year by Congress. Other countries are expected to follow suit, Cecchetti said, so that the new capital rules are in place by 2013 across major financial markets.
Cecchetti said the Basel group is looking toward a second round of changes designed to expand the "regulatory perimeter" and ensure that a host of non-bank financial firms are adequately regulated.
The recent crisis drew attention to what was dubbed the "shadow" banking system: the network of hedge funds, insurance, securities and other firms that were beyond the scope of traditional banking regulations but helped throw the entire system into gridlock.
"We viewed banks as being the first step only. The regulatory perimeter cannot be porous" and allow companies that create credit and perform other functions of a bank to escape regulation, he said. "That means insurance companies, pension funds, securities firms - as a general statement we have to chase leverage."
The committee is also working with a companion group, the Financial Stability Board, to develop new requirements for the largest and most complex financial firms, which have traditionally been considered too big to fail.
The hope is to keep such firms on a tighter leash, with stiffer capital requirements and perhaps stricter lending and other rules to ensure that they either don't fail - or, if they do, that they will not need a public bailout.
Cecchetti said it might be left to each nation to decide what mix of regulatory tools to use. Economic conditions and the structure of the financial industry in each country may make it difficult to make a common set of recommendations, he said.
"My sense is that ultimately it will have to be up to national authorities when and how to do that," he said. "We cannot sit in the northwest of Switzerland and decide for them."