A senior US central banker believes ratcheted-up rules could have severe consequences.
These are heady days for banking regulators and supervisors the world over. Basel III looms on the horizon in a financial sector somewhat shaken, but not stirred, by the events of a little more than a year ago.
Although it now feels like a bygone era, it is a little more than a year since the collapse of several regional US banks and, after that, Credit Suisse, which was seemingly forced into UBS's arms at the Swiss government's prodding.
Large Differences
Since then, governments and regulators have been trying to figure out what happened and, besides that, act. What can be seen at this point is that substantial differences in opinion and philosophy are starting to emerge.
As finews.asia previously reported, the Swiss government is looking at a straightjacket of significantly enhanced capital rules, something UBS expressed clear skepticism about at the time of its AGM at the end of April.
Skeptical Eye
That latter view is now also being espoused by the Federal Reserve Board of Governors member Michelle Bowman.
In a speech at the Texas Bankers Association in Arlington last Friday, she cast a skeptical eye over the entire Basel III framework looming on the horizon, whose «endgame» capital rules she characterized as «excessively calibrated and disproportionate to risk».
Significant Understatement
«This proposal contemplated a 20 percent increase in risk-weighted assets across bank holding companies subject to the rule. Public commenters raised significant concerns that the limited analysis included with the Basel III proposal may have significantly understated the scope of the capital increase,» she indicated.
She believes that the effects will be very predictable if it is implemented as proposed. It will prompt higher costs for bank customers while narrowing the selection and availability of financial services, prompting the provision of services to migrate to the lost cost provider, including non-banks.
Severe Consequences
«Driving risk out of the regulated banking system could lead to marginal improvements in bank safety and soundness, but the consequences for financial stability could be severely adverse,» she stated.
The Swiss government, however, is on an entirely different track, putting great store in the use of top-down rules such as capital and leverage ratios, as finews.asia has indicated.
Fixing the Roof
It might be wiser to strengthen on-the-ground regulation and better supervise entities in their jurisdiction, as that is an element that is currently clearly weaker than at other mainline financial hubs – even if that is the harder and longer path from a domestic political viewpoint. Still, there is one point that both the US and Swiss can probably agree on, at least in form if not content, and something that Bowman also infers in her speech.
«In my view, it would be better to fix the roof now, while the sun is shining, by addressing over-calibrated leverage ratio requirements and moderating capital increases for the Basel III proposal,» she said.
