U.S. has much to prove on new bank capital rules

September 23, 2010

American banks and regulators have a poor track record when it comes to adopting global capital standards. The United States was a major driver behind the Basel II accord, signed in 2004, but then barely implemented the rules on an extremely late schedule. That is why many Europeans are right to be wondering whether the tough new framework known as Basel III, agreed by global regulators earlier this month, will again be deemed optional on the other side of the Atlantic.

Senior U.S. officials are making the right noises. Treasury Secretary Timothy Geithner told Congress on Wednesday the United States is “committed to meeting” the end-2012 implementation timeframe. FDIC Chairman Sheila Bair is even more optimistic. She told Reuters this week the American delegation had wanted a quicker transition and reckons plenty of U.S. banks will do it faster on their own anyway.

The confidence is welcome — but hard to reconcile with reality. For one, the same bullish rhetoric accompanied the Basel II agreements. True, the United States was far more relaxed about risk before the crisis. And while Basel II would have allowed some banks to operate with even less capital, the new agreement should make the industry much safer. But the crisis is fading from memory as credit writedowns and corporate defaults wither.

Many of the same pitfalls that befell Basel II in the United States still lie in wait. As Europe pressed ahead, American congressional and regulatory authorities haggled over which banks should adopt the standards, the use of internal models to measure risk and the potential problem of inconsistent application of the rules globally. Some of these arguments were valid, and it’s easy to see similar disagreements arising again.

What’s more, even though today’s U.S. regulatory regime may be stronger with the Federal Reserve as a newly powerful linchpin, it remains a complex web. And these fragmented agencies are already coping with more than 2,000 pages of financial reform.

It’s possible the United States might move the new capital rules to the front of the queue and finally become a global leader on the issue. But since it failed to do so last time, the rest of the world understandably won’t want the shame of being fooled twice.

Comments

Dear Mr. Goldfarb.

Why don’t you look at the capital ratios of the top 10 banks (by assets) in Europe and then compare them to the top 10 banks here in the good old USA and tell me what you find…

(I think you will find that our banks are better capitalized than yours)

Posted by y2kurtus | Report as abusive
 

True. It won’t be the rest of the world to be fooled next time round. Many lessons were learnt about wall street’s manupulative practices. No contagion effect and any disasterous consequences would be contained geographically. The important thing is to get the capital rules implemented speedily, set a target date in the near term (preferrably less than 1 year for transition), and monitor any inadequacies from then on. One thing for sure is that Basel III is more risk-oriented than previous versions and the wiggle room will be minimized.

Posted by plubber | Report as abusive
 

And the  “more than 2,000 pages of financial reform” do not mention even once the Basel Committee or the Financial Stability Board… how about that for a disconnect! 
But just you wait till the tea-partiers and other questioners get hold of what follows: In the land of the free and the home of the brave, the banks are not free and are instructed to be coward, all as a result of the orders given by the Basel Committee. 
A visitor from outer space, when observing its bank regulations, would most likely conclude that the US is communistic and dumb-dumber. 
Communistic because current bank regulations require a bank to hold 100% of the standard capital requirement when lending to a small business or entrepreneur, but only 0% of it when lending to its triple-A rated government.  
Dumb because getting out of this economic imbroglio requires a new generation of jobs and the small businesses and entrepreneurs have the best chances of finding these; and dumber because no bank crisis have ever occurred from excessive lending to small businesses and entrepreneurs perceived as risky, they have all resulted from excessive lending to what is perceived as not risky and later turn out to be risky… like over-indebted triple A rated private or governments.  
Per Kurowski
A former Executive Director at the World Bank (2002-2004) 

Posted by PerKurowski | Report as abusive
 

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