The Federal Reserve continues to struggle with adoption of Basel III. I firmly believe it is a futile and useless exercise, which should be abandoned, as I state in my most recent article in the American Banker, summarized here. I declined to adopt Basel I when I was Chairman of the FDIC and believe it does more harm than good.
I believed firmly – and still do – that eventually the countries with the best/strongest banking systems would prevail in the global marketplace. During the 1980s, Japan had a weak bank regulatory regime, and yet its banks were dominating the international banking scene, including the U.S., with their enormous and weakly capitalized asset growth. That soon gave way to huge credit losses, and the Japanese banks have not been much of a factor in the U.S. or elsewhere since.
Much of the world has since adopted Basel I and II, with the U.S. being the laggard on Basel III, currently under debate. The plain and clear truth is that the U.S. and the world do not benefit from the Basel I, II and III capital regimes. The Basel regimes are riddled with complex and dubious models, and are expensive, cumbersome, and nearly impossible to understand and enforce. The financial world moves much too quickly to tolerate more than a decade of development and startup time for each of the three Basel regimes. And in their drive to promote uniformity among nations, the Basel rules drive down the capital standards among the stronger nations.
The U.S. should abandon the Basel regime completely and return to the days when where bank regulators met, communicated, coordinated, cooperated, and supported each other – and where we trusted individual nations to determine the form and degree of regulation that would work best in their countries. If we want to retain consultations under the auspices of the BIS, so be it. But let’s get Basel out of bank regulation and supervision, at least in the U.S.
Read the full article here.