Beware the banking industry's diversionary tactics on Basel

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As a former regulator, secretary general of IOSCO — the International Organization of Securities Commissions — and now as part of CFA Institute, I have been involved in capital markets and financial stability issues for some time. From this perch, I take exception with the constant grumbling of the U.S. banking industry and their lobbyists casting the Basel III process as a threat to the economic prosperity of individual citizens and the overall competitiveness of the U.S. economy. To be clear, the cost to our economy and its citizens for having inadequate bank capitalization and poor risk management practices during the global financial crisis was enormous and detrimental. The opponents of Basel III are many of the same organizations at the center of that crisis and their complaints about the rules being proposed in Basel III are at best ironic, and at worst irresponsible. We have yet to complete the work agreed upon for bolstering our economic resilience postcrisis and Basel III brings us full circle in our efforts to improve systemic risk protections and expand the set of tools for dealing with economic instability.

The latest proposals from the Financial Stability Oversight Council are long overdue. The proposed measures complete systemic risk improvements left undone since the financial crisis. Basel III proposals are minimum standards that are an essential part of the commitments made to address gaps in systemic risk and improve the preparedness of our economic system following the worst financial disaster in the U.S. economy since the Great Depression. In the many years since, a flow of proposals has continued to build economic resilience into our system. Basel III is no different. It is simply the latest effort to keep pace with evolving systemic threats.

Industry advocates have made repeated claims that the U.S. banking system is currently sufficiently capitalized and has easily weathered economic disruptions since the global financial crisis. While banks are certainly better capitalized than before, this argument completely ignores the fact that multiple forms of public support and assistance have been provided through government backstops. They include unprecedented fiscal and monetary support in the aftermath of the crisis, the COVID pandemic and most recently, the use of the "systemic risk exception" to backstop the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. Basel III is a meaningful step forward in ensuring that banking organizations maintain a level of regulatory capital that sufficiently reduces the probability that systemwide mechanisms will be invoked, particularly for large, operationally complex institutions with significant market exposures. To be blunt, we still have no solution for "too big to fail" banks, which have grown in number since the financial crisis.

It is also important to remember that the Basel III initiatives are part of a much broader, global effort. International standards were designed in the GFC aftermath to reduce the probability of global financial contagion and to reduce the likelihood that public support would be necessary during periods of severe economic downturn. Politicians routinely mischaracterize these efforts as domestic banking authorities taking their cues from global governance bodies. This is simply not true. The fact is these latest proposals were agreed to long ago and are part of continued global coordination that includes a simpler, standardized approach to capital requirements. This is particularly important in the areas of credit risk and ever-more sophisticated risks to operational preparedness. Basel III is not a matter of taking cues, but it is pivotal for ensuring consistent application for banking organizations across the world, particularly given the global nature of financial services today. 

Federal Reserve

Capital reform could 'deviate' from Basel agreement: Fed's Bowman

The Federal Reserve Board governor and frequent regulatory critic says it would be appropriate for the U.S. to deviate from the agreed-upon international standards to reflect "unique characteristics" of the American banking system.

By Kyle Campbell

April 10

To understand the implications of Basel III, the CFA Institute Systemic Risk Council evaluated the potential impact of the initiative's key features.

First, the proposed rules would materially revise and extend the regulatory capital requirements that apply to large banking organizations and those with significant trading activity adding crucial economic capacity to weather systemic disruptions.

Additionally, this new framework for calculating risk-weighted assets, referred to as the expanded risk-based approach, would be broadened to apply to all large banks, defined as banking organizations with total assets of $100 billion or more that would help cover vulnerabilities in banks similar in size to the likes of Silicon Valley Bank.

Finally, the expanded risk-weight approach introduces a more comparable and consistent framework for calculating capital requirements for credit, market, operational and credit valuation risks. This greatly facilitates more effective supervisory and market assessments of capital adequacy. 

The Basel III proposals are a major step in completing the implementation of global agreements to ensure large banking organizations are appropriately capitalized to better withstand all manner of economic disruption. Basel III's focus on maintaining and further calibrating regulatory capital along with improving global coordination on systemic risk management is fundamental. If we seek a more systemically prepared global economy, these are vital elements for stability in the decade ahead.