Two U.S. senators joined the call for regulators to rely less on complicated Basel capital rules and more on straight-forward leverage ratios to reduce risk in the financial system.
Senators Sherrod Brown, an Ohio Democrat, and David Vitter, Republican of Louisiana, urged the Federal Reserve and two other bank regulators to “focus on the level of pure tangible common equity at financial institutions,” according to a letter they sent today. The Basel Committee on Banking Supervision’s capital requirements, approved in 2010 and scheduled to take effect next year, are too complicated, they wrote.
The Basel rules have come under attack for increased complexity and allowing banks to game the system by playing with their risk models. Thomas Hoenig, a Federal Deposit Insurance Corp. board member, said last month that they should be scrapped in favor of the leverage ratio. Unlike Basel’s main capital requirement, the leverage ratio measures equity compared to total assets, ignoring whether they’re deemed risky or safe by the bank or regulators.
“The answer is not more and more complex capital regulations,” wrote the lawmakers, both members of the Senate Banking Committee. “Simpler, more robust capital rules will benefit smaller banks and properly align incentives for megabanks.”
The senators join Bank of England officials Andrew Haldane and Robert Jenkins, and former FDIC Chairman Sheila Bair in urging that the leverage ratio be the main factor in capital calculations. While the revised Basel rules have a leverage requirement, it’s secondary to the risk-based considerations.
Basel’s proposed 3 percent leverage ratio -- which means a bank’s assets can be 33 times its common equity -- is too low to ensure the financial system’s safety, the senators said, without offering their own figure. Bair has called for an 8 percent requirement, while Hoenig has said about 10 percent is reasonable. That would force the four largest U.S. banks to sell more than $300 billion of stock, or forgo dividends for the next 5 1/2 years, according to data compiled by Bloomberg.
The Fed, FDIC and the Office of the Comptroller of the Currency are in the process of implementing the Basel rules. While the Basel committee brings together regulators and central bankers from 27 countries, its rules aren’t binding on members. Each nation translates the standards into their own regulatory frameworks.
The three regulators have published the U.S. version of the framework and are soliciting comments until Oct. 22.
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