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Bair Details Inside Story of Regulatory Clash Over Basel III

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WASHINGTON — Sheila Bair, former chairman of the Federal Deposit Insurance Corp., nearly succeeded in forcing the largest banks to hold at least 10% common equity capital as part of Basel III rules, but was stymied by Treasury Secretary Tim Geithner.

In her book released Tuesday, "Bull by the Horns," Bair offers new behind-the-scenes details of her aggressive push for higher capital requirements, including allegations that Geithner attempted to water down the international deal.

Following the financial crisis, there was a "strong consensus" by members of the Basel Committee on Banking Supervision that banks should hold higher capital, Bair said. But international and domestic regulators were divided about what the right level should be.

While the panel attempted to hash out an agreement, Bair said Geithner unexpectedly inserted himself into the discussions, calling a meeting in spring of 2010 to discuss the U.S. position even though Treasury was not part of the Basel Committee.

During that and further meetings, which included Federal Reserve Board Chairman Ben Bernanke and central bank Gov. Daniel Tarullo, Bair said all three regulators were "uncomfortable" with Geithner's interference

"It wasn't clear whether Tim was trying to build consensus among the U.S. regulators or trying to stir the pot," writes Bair, who had a strained relationship with the Treasury Secretary. "At each meeting, he would try to elicit our views on what the new standards should be, but he was very cagey when it came to expressing his own views."

But Geithner's presence in the talks was just one factor in a long drawn out battle over capital requirements — a fight that involved not just the FDIC, Fed and Office of the Comptroller of the Currency, but overseas supervisors.

The War Over 10%
Regulators at the time were still wrestling with exactly how much capital to require. According to its own analysis, the Basel Committee projected that a bank's common equity capital ratio should range between 7% to 11%. Fed research, meanwhile, said the ratio needed to be between 8% to 10%.

Bair — "never bashful" — pushed for 10%, including a capital conservation buffer. She pointed to FDIC analysis that showed the two weakest big banks — Citigroup and Bank of America — would be able to achieve a 10% tangible common equity ratio given enough time.

But she also supported a Fed plan that would institute an 8% requirement of all banks, but only if the Basel Committee agreed to an additional surcharge on systemically important financial institutions, or SIFIs.

Still, U.S. regulators had trouble convincing French and German officials to go along with the idea.

In part, this was due to weak leadership from the Fed, Bair said, criticizing Pat Parkinson, the central bank's lead negotiator, for not speaking up more.

"The Fed representative was supposed to be the head of the U.S. delegation, but Pat hardly ever spoke up," Bair writes. "He talked a good game when he met with us, but when it came to engaging the French and Germans during the Basel Committee discussions, he was reticent."

Similarly, Bernanke appeared reluctant to weigh in at the meetings of the Group of Governors and Heads of Supervision, a collection of the principals of international regulators, in part because of his status.

"As the head of the world's largest central bank, he didn't want to get down into the fray, which I understood," Bair writes.

Dudley and Tarullo, meanwhile, also "spoke with frustrating rarity."

"I didn't know if they were just intimated by mixing it up with the French and Germans or whether I was being gamed and they didn't really want reform," writes Bair.

But Bair found an unlikely ally in Mervyn King, the head of the Bank of England, and Adair Turner, who headed financial services regulation at the bank.

"Together they were quite a 'dynamic duo' in advocating for higher capital requirements," she said.

They were also joined by Philipp Hildebrand, a career banker who headed the Swiss National Bank.

"Between the U.K. and Swiss delegations, most of the arguments that needed to be said were said. I just wish more of them had come from the U.S. delegation," Bair writes.

In part to prompt Tarullo to speak out more, Bair said she decided to play "a little game" with the governor and former academic. Saying he was known to have a "bit of an ego" and that he "didn't like hearing me take an active role in some of the discussions," Bair said she would gesture to hit a small button on the microphone to signal she wanted to talk any time the French or Germans made an "outrageous argument."

Tarullo, she said, would "catch me out of the corner of his eye and almost always jump first."

Geithner Power Play
Although the financial industry was opposed to the 8% threshold, U.S. regulators entered the September 2010 meeting committed to the idea, although they were willing to fall back to 7% if a capital surcharge would win support from other international regulators, including the Germans.

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