Wednesday, September 22, 2010

Basel III Success Depends On Banks Accepting Spirit Of Rules, Says BOE- MUST READ

Banks cannot be allowed to manipulate the new Basel III regulations if the reforms are to be successful, a senior Bank of England policymaker said on Tuesday. Andrew Bailey said new Basel III banking rules - which propose a substantial rise in banks' capital reserves - will only work if banks do not dilute them "under the banner of arbitrage masquerading as innovation." "Financial services is an industry where arbitraging rules and regulations is habitual, even addictive," he said in his Mansion House speech in London. "We have no desire unduly to suppress enterprise and innovation, but doing the right thing and preserving financial stability means accepting the spirit of the rules." Bailey drew attention to Basel III's emphasis on loss-bearing capital - capital that can bear losses outside insolvency - saying the new rules must not be "chipped away." "If the capital buffers are in future genuinely loss bearing capital with no tricky wrinkles, and we keep to this outcome, we have taken a good step forward," he said. "Sadly, that was not the case with Basel I in the late 1980s when I started out as a banking supervisor." Meanwhile, Lord Adair Turner, the Chairman of the Financial Services Authority, said banking reforms must go beyond the "demonization" of overpaid traders and bankers' bonuses and must target the fundamental philosophy of global financial regulation which failed to identify and adequately address the risks that eventually led to the global crisis. "There were some absurd bonuses for excessive risk taking: there was an explosion of exotic product development which last year I labeled as 'socially useless,' a phrase from which I in no way draw back," Turner said. "But we need to move beyond the demonization of overpaid traders to recognize that, in finance and economics, ill-designed policy is a more powerful force for harm than individual greed or error, and to ensure that we address the fundamentals of what went wrong." Turner described the new Basel III banking rules - which propose a substantial rise in banks' capital reserves - as a "major step forward," and defended the proposals against criticism that they were not strict enough. "If we were philosopher kings designing a banking system entirely anew for a greenfield economy, should we have set still higher capital ratios than in the Basel III regime? Yes I believe we should. "But starting from where we actually are, the Basel III reforms will significantly improve the resilience of our banking systems without harming economic recovery." The Basel III reforms require internationally active banks to hold a minimum 7% of assets as common equity - significantly higher than the international standard of 2%. This includes a special capital buffer of 2.5% to withstand future periods of stress in the financial markets. The rules will come into effect in 2013, by when banks are expected to set a 3.5% of assets aside as minimum common equity, and will be gradually phased in over the next decade so that banks can adjust to the new rules.


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