Regulators redesigning international capital standards must incorporate the risk management advances banks have made, Chase Manhattan Corp. president Thomas G. Labrecque said Friday.
Any detailed regulation, he warned, could interfere with the complicated risk identification and measurement systems in use at the country's largest banks.
"Don't overregulate the specifics," Mr. Labrecque advised during a conference on bank capital. "This is a very dynamic business. You have to make sure that what you do is flexible enough to fit the (wide range of) institutions being examined.
"What is going to be good for us ... is going to be much different for the First National Bank of Saratoga Springs," he said.
Mr. Labrecque's speech capped a two-day conference devoted to crafting the next generation of capital standards. Meeting at the Federal Reserve Bank of New York, 250 bankers and regulators from around the world debated ways to improve on the 1988 Basel Accord, which created risk-based capital standards.
"We all agree that changes are necessary," Mr. Labrecque said. "The accord doesn't have enough risk differentiation."
Under the capital standards, a bank's assets are assigned to four categories, with the riskiest requiring the most capital. However, regulators concede that innovations of the last 10 years, such as securitization, have let banks circumvent capital mandates.
Regulators, including Federal Reserve Board Chairman Alan Greenspan, acknowledge risk-based capital minimums are misleading. Many regulators go further, calling the ratio meaningless.
In a speech here Thursday, Mr. Greenspan said the rules must evolve to capture more than credit risk and account for a bank's hedging, diversification, and portfolio management.
Mr. Labrecque picked up on these shortcomings and detailed Chase's system of identifying and measuring an array of risks, emphasizing that its models are constantly being improved.
For example, Chase stress-tests its portfolio under five scenarios, including the 1987 market crash and the 1994 peso crisis. He said four tests are being added, including such unknowns as the impact of a potential Mideast conflict and the effect of Europe's monetary union.
Whatever requirements regulators settle on, Mr. Labrecque said, they will not match the demands banks are making of themselves.
"The systems we will require will be much more complicated than what's required by regulators," he said. However, Chase is cooperating with the regulators to ensure that any new standard does not conflict with the bank's own evolving system, Mr. Labrecque said in an interview after his speech.
"We need to make sure the change is consistent with the way we manage risks," he said. "We want them to move in our direction."
Mr. Labrecque has some other suggestions for regulators trying to judge how well a bank is managed.
Examiners could track the subordinated debt issued by a bank, checking how it is priced, how the market reacts, and how the debt trades, he said.
A semi-private system of deposit insurance could also shed some light on bank operations, Mr. Labrecque said.
"I would argue if institutions were to buy commercially, privately, the first 5% of the insurance coverage on their deposits, you would learn a lot about what's going on in an institution by how that's priced," he said.
"It might not be a bad idea."
