Academic journal article ABA Banking Journal

Rethinking the Framework

Academic journal article ABA Banking Journal

Rethinking the Framework

Article excerpt

RISK-CAPITAL REFORM PART I

When a committee of regulators in Switzerland called last June for reform of the 1988 Capital Accord, most bankers agreed that changes were needed. But even then, a few bankers disagreed with the reform agenda or with the Basle Committee's views on updating solvency standards. Now, as more views are becoming known, it appears that quite a few bankers are concerned about the reforms.

Bankers who have been positioning their organizations in the whirlwinds of electronic commerce and financial modernization may stand to benefit the most from capital reforms. That's because in the competitive ideal set out by The Financial Modernization Act of 1999, success will come to those who use their economic capital more efficiently, not just to those who can pump up their performance ratios by lowering their regulatory capital. Yet, e-bankers and other progressive competitors fear that the continuing costs of regulatory ambiguities and inconsistencies could diminish or even eliminate the benefits of enlightened changes in bank capital rules. Traditional bankers are also concerned, though for different reasons. Those bankers without internal ratings models, about 80% of the industry, fear that external ratings agencies will be given too much influence over banks' lending decisions. And all bankers who have tried to boost their noninterest income during the last decade are concerned that capital charges will be unwisely imposed on the operating services which generate much of their fee income.

These are pressing issues, for even the smallest banks have a vested interest in fair and consistent capital standards. After financial modernization, it will be hard enough to define peer groups without having to answer for comparisons which use flawed measures of capital-based performance. If all the concerns just now taking shape can be fully articulated by bankers and their interest groups, they must be presented to the Basle Committee by March 31, 2000, when comments are due on the reform recommendations.

To engage in the debate of capital standards is to argue Banking's role in Capitalism. As such, the regulators want bankers to argue, not solely as practitioners, but also as social philosophers and historians. For it is clear in the speeches and consultative papers of the standard-setters, that reforms will only be considered within a long-wave, global context; one in which many views, goals, and technologies have been competing for dominance throughout generations of bankers and their regulators. "We should be planning for the long pull," Federal Reserve Board Chairman Alan Greenspan warned bankers at the 1999 American Bankers Association conference, "not developing near-term quick fixes. It is the framework that we must get right."

Why local bankers need global standards

Capital standards are intended to insure fair, robust competition in banking, reasonable protection for depositors and investors, and financial stability. Today, investors and other stakeholders of internationally active banks look to the Basle Committee for standards with which to judge the strength of their banks. This was not always so. For many years, customers looking for guidance had only themselves or domestic regulators with no trans-national standards to help them evaluate banks' solvency. Often, foreign banks competing domestically were held to less demanding reserve requirements back in their home markets. This gave them a pricing advantage over local banks--but at the expense of a riskier financial system, especially during cyclical downturns. That kind of "regulatory capital arbitrage" was curtailed to a degree after 1988, when regulators, meeting as the "Basle Committee" at the Switzerland-based Bank for International Settlements (BIS), agreed on minimum capital standards for all internationally active banks.

The ability to come to consensus in the Basle accord was a milestone for global bankers. …

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