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Basel Warns Against `Myopic' Calls to Ease Bank Capital Demands

  • Investors take `unhealthy' view of banks, Basel's Coen says
  • Regulators' focus is on the long term, not short-term fixes

Global regulators on the Basel Committee on Banking Supervision are pushing back against calls for them to ease capital requirements on lenders to stimulate lending.

The job of the committee, which brings together regulators from Australia and China to Italy and the U.S., is to define minimum standards rather than to set out the “optimal level” of capital, Secretary General William Coen said in the text of a speech to be delivered Tuesday in Sydney. That approach doesn’t preclude individual jurisdictions from making tougher demands, if that is what they wish to do, he said.

“Basel standards are minimum standards that support a sound banking system at all stages of the financial cycle,” Coen said, according to the speech. “Some stakeholders seek short-term fixes, with some investors, and perhaps others, taking an unhealthy, if understandably myopic, view of bank performance and resilience. Our focus is on a far longer term.”

The committee has come under fire from the financial industry and from some politicians, who accuse regulators of setting capital requirements that are too tough as they seek to reduce leverage and risk in the banking system. Moves to rein in risk-taking by making it more expensive for large banks to grow have also been criticized for crippling European lenders’ investment banking businesses.

The committee is reviewing banks’ use of their own models as it attempts to make capital ratios more comparable and reduce the variability of risk weights lenders assign to their investments.

Last month, Basel proposed forcing banks to use a standardized method set by the regulator to calculate regulatory capital rather than their own models. In cases in which internal models would be still permitted, the committee may impose an “output floor,” a limit to the amount by which results can diverge from those obtained using the standardized approach, Coen said.

“An output floor would cap the amount of capital benefit a bank using an internally modeled approach would receive vis-a-vis the standardized approach,” he said. “The committee is still considering the specific design and calibration of an output floor.”

To be able to properly estimate what they have at stake, banks need to improve their computer systems, with a particular focus on their ability to aggregate risk, he said.

“Banks’ risk data aggregation capabilities have been a source of concern for the committee for some time now,” he said. The financial crisis showed “many banks could not properly measure risk exposures and identify concentrations quickly and accurately, especially across business lines and legal entities. Risk reporting practices were also weak.”

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