HSBC’s Mackay Says ‘We’re All Stuffed’ If Basel Sticks to Plan

  • Banking outside U.S. would grind to a halt on rules, he says
  • Most people believe Basel will soften proposals, Mackay says

Banks would be “pretty much stuffed” and the industry outside the U.S. would suffer if global regulators don’t tone down a proposed revamp of the rules used to determine capital requirements, said Iain Mackay, group finance director of HSBC Holdings Plc.

The Basel Committee on Banking Supervision has vowed not to boost capital requirements “significantly” as it wraps up revisions to the international regulatory framework this year. But if the Basel Committee’s current proposals were implemented as they stand, “banking would grind to a halt outside the United States,” Mackay said in a meeting with analysts earlier this month.

“If you simply take what’s presently out there for consultation and add them up, for banks that apply Basel III,” he said, “the numbers are massive.” That’s why “most people believe they are not going to land where they land today,” he said, according to a transcript of the meeting posted on HSBC’s website.

The Basel Committee is overhauling the rules for how banks assess asset risk, restricting the use of internal models blamed for variations of as much as 20 percent in the risk weights banks attach to similar assets. This lack of consistency undermines confidence that the capital ratios lenders report reflect the real risks they take on, according to the regulator.

Internal Models

By year-end, the Basel group plans to issue new standardized approaches for measuring credit and operational risk. New market-risk rules published in January will result in a weighted mean increase of about 40 percent in trading-book capital charges, the regulator said. It also plans to restrict banks’ use of the so-called internal ratings-based approach, in particular by setting floors to limit how far internal models may diverge from standardized approaches.

Mackay said the proposed constraints on the use of internal models have “increased uncertainty” for bankers.

“We still have a bit of work to do –- quite a lot of work to do –- in terms of our engagement as a firm and our engagement as an industry in order to get to the goals the Basel Committee have set out, which are greater comparability, improved risk sensitivity and reconciling that without more capital in the banking system as a whole,” he said.

Asked if the U.K. Prudential Regulation Authority would have enough flexibility in its use of so-called Pillar 2, bank-specific capital buffers to offset higher requirements generated by the Basel committee, Mackay was dismissive.

‘Small Fraction’

The PRA, part of the Bank of England, sets additional minimum requirements that vary by bank, known as Pillar 2A, to cover “shortcomings in the measures of risk-weighted assets,” and a Pillar 2B requirement, known as the PRA Buffer, for risks not captured by other buffers.

These buffers give the PRA some leeway, but Mackay said it wouldn’t suffice.

“If you take the Pillar 2A of HSBC and all its competitors and add it all up, it doesn’t come to a small fraction of what you add up for the possible impact of standardized, IRBA, operational risk and the market risk components,” he said. “You sort of have to put yourself in a position where you either believe that there will be no flex off the current consultation, in which case I think we’re all pretty much stuffed.”

If it comes to that, Mackay said, HSBC will be better off than most of its competitors.

“If we’re all stuffed, then we’re less stuffed than everybody else, because we generate capital and we have multiple means by which we can manage capital to overcome the obstacles that have been put in front of us sooner than anybody else,” he said.