By Alexandra Alper and Huw Jones
WASHINGTON, Sept 14 The United States should
reject Basel III bank capital standards if the international
panel that drafted them does not make dramatic changes to the
rules, a director at the U.S. Federal Deposit Insurance Corp
said on Friday.
Speaking at the American Banker regulatory symposium, FDIC
director Thomas Hoenig said the current standards deserve a
total rethink because they are too complex and are based on
subjective judgment calls.
"I believe the Committee should agree to delay
implementation and revisit the proposal. Absent that, the United
States should not implement Basel III, but reject the Basel
approach to capital and go back to the basics," said Hoenig, who
joined the FDIC board in April after retiring as president of
the Federal Reserve Bank of Kansas City.
The FDIC is an independent agency that insures U.S. deposits
and oversees some banks.
Basel III will be phased in over six years starting in
January and will force banks to hold roughly three times more
basic capital than under the current Basel II accord. The
biggest banks will have to hold even more.
Hoenig said Basel III "continues an experiment that has
lasted too long" and added that the "enormously complicated" new
rules would open the door to malfeasance.
"If you add 400 more rules, or 400 equations, that is 400
more ways to game the system," he said.
Banks across the globe have supported boosting capital
requirements following the financial crisis.
They have complained, however, about the particulars of the
Basel III agreement. The largest institutions have said it goes
too far in forcing financial giants to hold extra capital
buffers, while community banks have said the base framework does
not work for the type of assets they hold.
"Director Hoenig is expressing what thousands of bankers
have also recognized: That applying the international Basel
standardized capital rules to all banks, in a one-size-fits-all
manner, is a bad fit for most if not all U.S. banks," said Wayne
Abernathy, an executive vice president at the American Bankers
Ed Mills, an analyst at FBR Capital Markets, said Hoenig's
comments come as community banks gain momentum in their fight
against coming under all of the pending Basel III rules.
Community banks, Mills noted, effectively blocked the full
implementation in the United States of earlier Basel II
requirements and could be a threat to Basel III.
"A lot of larger institutions are probably quietly cheering
on Hoenig and the community banks," said Mills.
A DIFFERENT APPROACH
Hoenig proposed an alternative way of checking whether a
bank has enough capital - a tangible equity to tangible asset
ratio. He said it would be a simpler, more objective measure
that would better reflect a bank's ability to absorb loss in
good times and in times of crisis.
Still, Hoenig acknowledged it was unlikely for the U.S. to
all-out reject the Basel rules.
Hoenig is the second senior regulator to call for a rethink
of the world's core regulatory response to the financial crisis
that saw taxpayer bailouts of banks on both sides of the
Bank of England director of financial stability Andrew
Haldane called for a rethinking of Basel in August, saying it
may be too complex to work properly.
The Basel Committee is already facing pushback from several
regulators as well as banks on one of its core rules that will
force banks, starting in 2015, to build up a buffer of liquid
assets to withstand a month-long market shock without help.
The Basel committee met in Istanbul this week, but failed to
reach a deal on how far to scale back the rule that banks say
will crimp lending in the current tough economic conditions.
PRIVATE EQUITY INVESTMENT
Hoenig also touched on the thorny issue of whether private
equity firms should be allowed to invest in banks, a debate that
heated up during the financial crisis.
"I am very open to having private equity come into banks if
it is private equity to invest in commercial banking," he said.
In 2010, the FDIC imposed rules on private equity groups,
including large capital requirements to ensure strong funding
and a long-term commitment, and to weed out investors looking to
make a quick profit on troubled banks.