The worldwide playing field for banks had been levelling but just got jostled. One of America’s top regulators said on Friday the Basel III accord should be scrapped. Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corp, urged adoption of a simpler, stricter leverage ratio. A year after Jamie Dimon called the new worldwide global capital standards anti-American, the latest sign of resistance will only stoke fears about the US commitment to new rules.
The former president of the Kansas City Federal Reserve Bank joined the anti-complexity bandwagon. Hoenig contends that the 1,000 pages of capital rules introduce even more unwanted complications into an already overcomplicated bank supervision regime. Just last month, Andy Haldane, from the Bank of England, argued much the same against the “Tower of Basel.”
Hoenig wants banks judged on a more straightforward ratio of tangible equity to tangible assets. That would get rid of imperfect risk ratings. In his somewhat radical and belated plan, however, Hoenig first would need retail banks to shed their investment banking arms. Even that wouldn’t necessarily make them safer, though. A leverage ratio also can be gamed. To maximise returns, lenders could still load up on high-yielding but risky assets.
The quest for simplicity is understandable. Hoenig, however, in his speech honed in on Basel without factoring in other initiatives like living wills and the Volcker Rule designed to protect the system. More likely, and concerning, is that US bank executives, regulators and policymakers will latch on to his broader conclusion: that if Basel III isn’t revisited, the United States should refuse to implement it.
The rest of the world has already been pretty worried about that scenario. After leading much of the charge on the Basel II accord, signed eight years ago, the United States was slow to embrace it. Most US officials have been making the right sounds about Basel III. Dimon and other bank bosses also aren’t likely to sign up quickly for Hoenig’s ratios either. Financial institutions and authorities globally needn’t fear the worst about regulatory arbitrage just yet, but they’re right to remain wary.
