The world's core regulatory response to the 2007-09 financial crisis may need a rethink, a top Bank of England official said on Friday, as the rules due to start coming into force next January may be too complicated to work well.
Andrew Haldane, the BoE's executive director for financial stability said “less may be more” when it comes to financial regulation, calling for a “de-layering” of the Basel III accord to focus on a simpler gauge of bank stability.
The accord is a hard-won deal by world leaders to force banks to hold more capital that taxpayers are less likely to have to bail them out in the next crisis.
Haldane said it may not be up to the task.
“The Tower of Basel is at risk of over-fitting - and over-balancing. It may be time to rethink its architecture,” Haldane said in a speech to central bankers meeting in the United States at Jackson Hole, Wyoming.
Haldane said Basel's complexity means it will be “close to impossible” to measure default probabilities for a large international lender's banking book and work out how much capital should be set aside.
This raises “serious questions” about the robustness of the regulatory framework.
European banks could end up being forced to provide 30,000-50,000 different bits of data to regulators in future across 60 different regulatory forms, Haldane said.
The banks may need to employ 70,000 more people just to comply with Basel in Europe.
“Taken together, the emerging picture is of a steadily rising regulatory tower,” Haldane said.
He suggested steps to simplify Basel, such as placing its 3 percent leverage ratio on a equal footing with capital ratios. That would mean regulators relying more on their own judgements and less on banks calculating the size of their capital buffers based on complicated internal risk models, he said.
The leverage ratio is a simple measure of a bank's assets to capital and at 3 percent it means a bank's equity can be leveraged up to 33 times.
Basel's emphasis is on forcing banks to hold higher and better-quality capital buffers while its leverage ratio is only a blunt backstop in case of errors in capital calculations.
The Bank of England's Financial Policy Committee has already put leverage and capital ratios on an equal footing when it comes to supervising banks.
Banks that failed during the financial crisis tended to have lower leverage ratios of around 1 percent, Haldane said.
However, U.S. banks published leverage ratios before the crisis but regulators still failed to spot problems and some had to be shored up.
The complexity of banks could also be tackled by levying a specific capital charge to encourage simpler balance sheets, Haldane said.
Solutions such as the Vickers reform to force retail arms of UK banks to hold more capital can be complex to implement and that markets could encourage banks to sell off assets to simplify themselves, he added.
The Bank of England becomes the main regulator for banks and insurers in Britain from 2013. - Reuters