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Sanio Warns of ‘Financial Darwinism’ From Basel III

BaFin President Jochen Sanio
Jochen Sanio , president of German financial regulator Bafin, said global rules on capital and liquidity may lead to “financial Darwinism,” with only larger banks able to adapt to the requirements. Photographer: Alex Kraus/Bloomberg

Jochen Sanio, president of German financial regulator Bafin, said global rules on capital and liquidity may lead to “financial Darwinism,” with only larger banks able to adapt to the requirements.

A strict regulatory regime based on the Basel Committee on Banking Supervision’s rules may force some banks into a second tier, making it difficult to raise capital, Sanio said in a speech in Frankfurt yesterday. This in turn may hamper the economy, he said.

“There is a danger that only strong institutions will be able to adapt,” Sanio said. This would be a “brutal form of financial Darwinism with an ironic twist. The finance giants that came out of that would pose a much higher systematic risk.”

The European Union is considering how to adapt the Basel rules on bank capital and liquidity to smaller lenders. Europe’s savings banks have warned that the plans threaten their business model because they don’t have the same access to capital markets as larger lenders. The requirements “may have severe unintended consequences,” the European Savings Bank Group said last month.

Michel Barnier, the EU’s financial services chief, said last month that he will “carefully adjust” the rules for Europe.

Sanio said last night that the Basel rules may also hurt large banks that are included on a list of “global systemically important financial institutions,” or G-SIFIs, because they will be required to comply with even higher capital requirements.

Differs With Colleagues

“I don’t think that systematic risks will simply disappear just by requiring higher capital standards,” said Sanio. “Here I differ from some of my colleagues in other countries.”

Regulators will put together a list of about 25 G-SIFIs by the first half of 2011, he said. The process should be based on data from an impact study planned for the second quarter to avoid individual countries trying to downgrade their own banks to allow them to evade the higher standards, he said.

The additional capital requirements for such lenders, while unavoidable, should be “reasonable” to avoid hurting their ability to support economic growth, Sanio said. Additional capital standards for G-SIFIs shouldn’t be developed individually for each of these banks, he said.

“There should be a general standard for all G-SIFIs within a reasonable framework,” said Sanio. “You cannot underline the term ‘reasonable’ enough, because there must be some top limit to capital requirements.”

Bafin Quiz

Bafin has started quizzing German banks on how they are preparing to implement the new Basel standards. The results show some are well prepared, while others need to work “very fast” to make sure they’ll be able to comply, Sanio said.

The international capital and liquidity rules were published in December by the bank regulators. They will more than double the core capital banks must hold to protect themselves from losses and require banks to hold a minimum amount of highly liquid assets to ensure they could survive if inter-bank lending markets seized up for 30 days.

The Financial Stability Board said in a report published in November they are working on additional capital and rules for banks judged to be G-SIFIs.

Such banks “are institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries,” the FSB’s report said.

The measures may include a “capital surcharge,” requiring banks to issue minimum amounts of bonds which can be written off or converted to equity, liquidity surcharges and tighter risk limits.

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