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Last updated: September 14, 2012 10:36 pm

Regulator attacks new bank

standardsBy Tom Braithwaite in New York and Shahien Nasiripour in WashingtonA second senior regulator has criticised new bank capital standards, adding to doubts over a

central pillar of the international response to the financial crisis.

Tom Hoenig, a director at the Federal Deposit Insurance Corporation, called for financial

supervisors to reject the Basel III accords and instead institute simpler rules for capital and

liquidity. I suggest that we not only can go back, we must, he said in a speech on Friday.

His call follows that of Andy Haldane, executive director for

financial stability at the Bank of England, who last month told the

Jackson Hole conference of central bankers that Basel rules had spawned startling degrees of

complexity and an over-reliance on probably unreliable models ... It may be time to rethink its

architecture.

Basel III, which is being phased in until 2019, attempts to impose tougher capital levels on

banks to increase their chances of surviving another crisis without government bailouts. But

much of the new system relies on complicated assessments of the riskiness of different assets; itis this risk-weighting that is attracting increased criticism.

Instead, Mr Hoenig, former president of the Federal Reserve Bank of Kansas City, urged fellow

regulators to adopt a new measure to judge whether banks were holding enough capital to

backstop catastrophic losses, which he termed the tangible equity to tangible assets ratio.

Mr Hoenig said supervisors should compare equity capital minus what he said were add-

ons such as goodwill, minority interests, deferred taxes or other accounting entries that

disappear in a crisis to total assets, less intangible assets such as goodwill and deferred taxassets.

Such a measure better reflected the losses that a bank could absorb before failure, regardless of

how risks shifted, Mr Hoenig argued.

The FDIC official, whose agency can order large banking groups to dispose of subsidiaries or

discard existing business lines, told an American Banker conference that the starting point for

a mandated minimum level should be well above current levels. Under Basel III, the ratio

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that measures equity to assets is set at a minimum of roughly 3 per cent.

Mr Hoenig praised the 1 913-33 era of US banking in which banks leverage ratios ran between

13 and 16 per cent.

His intervention is unlikely to spell the end for US backing of Basel III. The Federal Reserve

remains committed to the new capital standards. The Fed declined to comment.

However, the US has a history of not implementing internationally agreed capital rules: it

backed away from applying the prev ious Basel II rules. Mr Hoenig, therefore, who could be

appointed to run the FDIC if Mitt Romney takes the White House, is injecting some uncertainty

into the process.

That is a mixed blessing for banks. Jamie Dimon, chief executive of JPMorgan Chase, has been

the most vocal opponent of new capital rules. Though he has supported higher standards, he

has said the current framework is anti-American and the US should consider dropping out of

the group.

At the same time, banks are well in to preparations for the new standards. Bankers say they

have done detailed work to assess which assets and businesses are no longer economic.

Basel IIIs new risk weights force banks to hold more equity sometimes many times more

against certain assets, such as structured mortgage products, deemed by regulators as more

risky.

Stefan Walter, former secretary-general of the Basel Committee, said it was now important to

finish the job on implementing the new rules. But Mr Walter, now head of Ernst & Youngs

regulatory practice, said: There is room to further simplify the risk-based measure, make it

more consistent across banks, and more transparent. That is precisely what the Basel

Committee is now working on through its review of the risk-weighting regime.