Federal Reserve Governor Sarah Bloom Raskin said regulators must complete new international capital rules because delays may be harming financial institutions by leaving them unsure how to plan for the future.
“Lending decisions and funding plans today are shaped by perceptions of business conditions in the future, and those conditions include the details of the final regulatory capital framework,” Raskin said today in prepared remarks for a speech in Columbus, Ohio. “It seems obvious to me that uncertainty over that framework is weighing on the balance sheets of banks that will be affected by the rules.”
Raskin, who did not discuss the outlook for the economy or monetary policy, called for regulators to hasten the implementation of new capital rules known as Basel III, adopted by the Basel Committee on Banking Supervision, and designed to improve the quality and quantity of regulatory capital. Both the European Union and the U.S. missed a January 2013 deadline to begin phasing in the standards.
“While it is important to get it right, this goal must be balanced with the costs imposed by delay,” Raskin said. “At a moment when the economy finally seems to be gaining some traction, I believe that finalizing a capital rule will minimize uncertainty related to capital requirements as well as promote safer and sounder banks.”
The Basel committee brings together regulators from 27 nations, including the U.S., U.K. and China, to coordinate rules for banks.
U.S. banking regulators said in November that they were delaying implementation of new capital rules because “many industry participants have expressed concern” the rules would go into effect before they understood or were able to adapt to them, according to a release from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
“There is significant justification for both higher levels, and higher quality, of capital,” Raskin said in the speech at Ohio Bankers Day, sponsored by the Ohio state banking regulator. “At the same time, however, for community banks in particular, more and better capital should be achieved without significantly increasing the complexity of capital calculations.”
Raskin, a former state banking regulator who was appointed to the central bank by President Barack Obama in 2010, praised the benefits of community banks, calling them “vital and competitive players in a highly diverse landscape for financial services.”
Global rule makers have also clashed with lenders over the severity of the Basel III capital and liquidity rules, which were set out in 2010 as part of an overhaul of international banking regulation standards in the wake of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.
The pace of implementation of Basel III “has been adjusted intentionally to support banks on the mend,” International Monetary Fund Managing Director Christine Lagarde said in a speech in Frankfurt in March, “but delays also reflect difficulties in agreeing on the way forward, and pushback from industry, averse to changing outmoded and dangerous business models.”
Raskin, 52, said that capital and liquidity rules need not be flawless, and that regulators will have to maintain vigilance supervising the activities of financial institutions.
“We have to resist the temptation to believe we can create a perfectly sensitive risk-based regime that gives the illusion of safety,” said Raskin. “Such a regime would not be a meaningful surrogate for effective on-site supervision, and the effort to try to create an ever-more refined system would distract us from some of the important policy questions that lie ahead for our financial system.”
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