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Basel Rules Mustn’t Be ‘Chipped Away,’ Bailey Says

Chairman of the U.K. FSA Adair Turner
Chairman of the U.K. Financial Services Authority Adair Turner, seen here, said he would have set higher capital ratios if he’d drafted the new Basel III regulations. Photographer: Jason Alden/Bloomberg

Bank of England Chief Cashier Andrew Bailey said the finance industry can’t be allowed to dilute the new Basel III regulations requiring banks to build up capital buffers.

“Financial services is an industry where arbitraging rules and regulations is habitual, even addictive,” Bailey said at an event in London yesterday. The rules must not “be chipped away under the banner of arbitrage masquerading as innovation,” he said. “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.”

Bailey said that officials should respect the spirit of new regulation as they moderate “dangerous” business models while supporting innovation. He will become deputy chief executive of the Prudential Regulation Authority, an agency of the central bank being created to prevent future financial crises.

“We have to build the case that the industry will serve the needs and interest of the public,” Bailey said. “We cannot have attitudes which put short-term gain first on the basis that the stability of the financial system can be tomorrow’s objective, for the next person.”

The Basel III rules designed by the Basel Committee on Banking Supervision will more than double banks’ capital requirements while giving them as many as eight years to comply in full. The European Banking Federation, a lobbying group, warned earlier this month that tighter rules may limit lending.

‘Memories Fade’

Nout Wellink, chairman of the Basel Committee on Banking Supervision, told an international meeting of bank supervisors in Singapore today that the rules need to keep pace with financial innovation.

“We must remember that memories fade quickly,” he said in a speech. “Regardless of how tough the new standards are and how we expect them to increase the resilience of banks and banking systems, they must be effectively implemented and enforced.”

Adair Turner, chairman of the U.K. Financial Services Authority, said he would have set higher capital ratios if he’d drafted the new Basel III regulations.

“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,” Turner said at the same event.

Public Interest

The public interest in financial stability should be defined as something more than the idea that “you certainly know it when it isn’t there,” Bailey said. It should include public confidence in the stability of soundness of banks in the absence of an implicit state guarantee of support for failed institutions, he said.

A stable financial system should allow firms to fail regardless of their size or importance, and creating such a system will require regulators to have the appropriate tools to act, Bailey said. He said that without these tools, lenders won’t have the right incentive to manage their own risks.

“We will not truly have solved the too-big-or-important-to-fail-problem, and thus the public money problem, until we have tools at our disposal which enable us to resolve large institutions if they get into trouble,” he said. “This will create the right incentive for risk management.”

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