The next generation of international bank capital rules is being delayed by "politics," Federal Reserve Board Chairman Alan Greenspan said Thursday.
In an unusually blunt assessment after a speech he delivered on the economy, Mr. Greenspan said regulators must stop protecting provincial interests and agree to update the 1988 Basel accord, which dictates how much capital banks must hold against various types of assets.
"The Basel accord is obsolescent," he said. "The complexity of finance is getting to the point that a single standard won't work."
He urged his foreign counterparts to defer to banks' internal calculations to set capital requirements.
"We must try to embrace the internal models of banking organizations to create in fact the capital requirements to meet the risks they face," he said. "It's what is inevitable."
Regulators have been working for years to update the 1988 risk-based capital rules, but momentum has increased since last summer when Federal Reserve Bank of New York President William J. McDonough took charge of the Bank for International Settlements' committee handling this issue.
Mr. McDonough was prepared to propose the revised standards on April 9 at a press conference in London, but the event was canceled after German regulators raised last-minute objections over real estate lending. The unveiling has not been rescheduled. Mr. Greenspan praised Mr. McDonough's efforts and predicted eventual agreement.
"We will get it resolved," Mr. Greenspan said. "We will get a more sensible structure."
The Fed released a Basel Committee study three days ago, concluding that credit risk models were not sophisticated enough to reliably set capital requirements. On the basis of a survey of 20 big financial institutions, the study found banks did not consistently measure credit risk and lacked historical data on loan performance.
Most in the industry seem to agree that the current risk-based capital rules need refining. Ernest T. Patrikis, the New York Fed's No. 2 official before leaving last year to become senior vice president and general counsel at American General Group Inc., described the rules as "absolutely broken."
In the last 10 years, banks have essentially sidestepped the rules by holding assets with low capital requirements and securitizing those that require larger set-asides. That has left regulators wondering whether they are providing the right incentives and whether assets being sold are really riskier than those left on balance sheets.
Interviewed after Mr. Greenspan spoke, banking consultant Bert Ely said international regulators should stop fixating on capital requirements. Instead, they should improve the market's ability to evaluate banks by fully disclosing accounting rules and loan-loss reserve standards, said the president of Ely & Co. of Alexandria, Va.
"The market is the best regulator," Mr. Patrikis agreed.
Mr. Greenspan also tackled year-2000 concerns in the question-and-answer session after his speech to the Federal Reserve Bank of Chicago's 35th Annual Conference on Bank Structure and Competition.
"I'm increasingly less concerned about whether there will be true systemic problems," he said of the year-2000 turnover. "What I am concerned about are people's fears."
The Fed chairman said he worries that media coverage, particularly talk- radio programs, could cause overreactions.
"The last thing you want to do is withdraw (from banks) large amounts of cash," he said, because that would make consumers prime targets for crime. "The safest thing to do is keep your money in the bank."
Mr. Greenspan said he foresees "some disruptions ... but in the end I think the impact on financial markets will be modest."