Citigroup's Pandit Says Basel Accords Could Make Credit Crunches Worse
While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said.
“By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S.
Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout. The so-called “Basel III” accords are designed to keep the banking system from “falling into crisis again,” Pandit said.
New regulatory goals announced in September by the panel, made up of regulators from 27 nations, has triggered a “bidding war” for setting the highest capital targets in different countries that will hurt economies, Pandit said.
Pandit also objected to Basel’s use of credit scores to measure risk for borrowers. Basel lifts capital requirements for loans to people with so-called FICO scores lower than 700 --more than a third of the U.S. population -- by 75 percent, while dropping the capital target by 20 percent for consumers with scores above 700, Pandit said.
“Basing risk measurements almost entirely on credit scores and data from the crisis years will mean that the ‘haves’ who need credit the least will get the most, and pay the least for it,” Pandit said. “The ‘have-nots’ who need credit the most will be hurt the most.”
In the developed world, the result may be that banks collect retail deposits from smaller, stable customers and lend mainly to big companies and the wealthy, Pandit said.
“I don’t believe this is the banking system we want,” he said.
John Gerspach, chief financial officer of Citigroup, which reported third-quarter net profit of $2.2 billion last week, told employees in September that the bank is “very comfortable” with the new Tier 1 common equity requirements set by Basel.
Pandit told the audience Citigroup didn’t need to halt foreclosures, unlike rivals such as Bank of America Corp. and Ally Financial Inc., because his bank has “integrity in the process.” Some lenders had imposed temporary freezes on foreclosures after allegations that lenders took shortcuts by using improper documents and signatures to justify seizing homes from overdue borrowers. The banks have denied any intent to deceive the courts.
Citigroup will be “delighted” to work with the new Consumer Financial Protection Bureau, the U.S. agency set up as part of the financial-services industry overhaul enacted this year, Pandit said.
The new agency will “focus on creating more transparency, choice and control for banking customers, all goals that we at Citi fully support and had begun implementing even before the new laws were passed and the bureau created,” Pandit said.
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