ECB officials defend Basel as US plans replacement

September 4, 2009

Bank of France Governor Christian Noyer attends a conference organized by the Paris Club and Institute for International Finance (IIF) on the impact of the crisis on emerging and developing countries in Paris June 25, 2009.  REUTERS/Benoit Tessier LONDON, Sept 4 (Reuters) – European officials defended the globally-agreed Basel II capital rules for banks on Friday despite a U.S. call for its replacement with a sweeping new regime within three years.

European Central Bank Governing Council Members Christian Noyer and Nout Wellink said the planned refinements to the Basel II framework were an improvement but more work was needed to tackle the causes of the financial crisis.

Europeans are pushing for more countries to adopt the Basel II rules. The United States has resisted and on Wednesday Treasury Secretary Timothy Geithner proposed a new international capital accord that would replace Basel II.

Geithner wants the new framework to be broader, require banks to hold more capital and be in place by the end of 2012 — an ambitious target as Basel II took a decade to thrash out.

Wellink and Noyer were writing in a Finance Stability Review report put together by the Bank of France before Geithner’s remarks. It is being presented on the sidelines of a G20 finance ministers’ meeting in London to strengthen financial regulation.

“Taken together, the recent and planned initiatives of the Basel Committee will promote a more robust banking sector and limit the risk that weaknesses in banks amplify shocks between the financial and real sectors,” Wellink said.

Wellink is chairman of the Basel Committee on Banking Supervision which drafted the Basel II rules.

However, he said: “The efforts of the Basel Committee need to occur in a broader context of achieving the right balance between the scope and depth of regulation.”

Geithner will present his plan for tougher global bank capital standards at the meeting of finance ministers, starting a process to eventually supplant the Basel II standards.

Noyer on Tuesday called for urgent adoption by the United States of the Basel II rules.

“Basel II, while a major improvement in terms of mitigating regulatory arbitrage and measuring risks, exhibits some procyclical features,” he said, nothing that the Basel Committee was looking into this.

But he said more changes were needed to address the root causes of risks to financial stability.

“In this context, a macroprudential framework should be created in order to complement the microprudential perspective and to mitigate its potential negative externalities at the financial system level.”

This refers to assessing how risks from banks can affect the broader financial system and the lack of such a mechanism is seen as a core lesson from the credit crunch.

Noyer said there was still no widely accepted method to measure such systemic risk “if this risk is able to be captured”.

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