In a recent speech, Jonathan McKernan, director on the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) outlined his views on Basel Endgame, which can be expected to be debated for much of this year.
Among his comments, McKernan noted that he was not able to support the July proposal for two main reasons.
“First, the banking regulators have not made a case for important aspects of the proposal. As I argued in my dissent and in October and December speeches, the Basel Committee did not offer any rationale for some of its key design decisions, and that has left us unable to defend or even understand important aspects of the Endgame standards that we have proposed to implement. The July proposal amounts to a big leap of faith in the Basel Committee, and if anything, the particulars of the Endgame standards should give us good grounds for skepticism and also potential grounds for some departures from those standards in our U.S. implementation.
“Second, to the extent the July proposal did find cause to depart from the Endgame standards, it was only with an aim to engineer higher capital requirements. This reverse engineering of higher capital paid little heed to the associated economic costs and, if finalized, would result in a capital framework unmoored from the principles that have historically rationalized the framework.
“But I’ve also argued that our Endgame debate need not be binary. I take others at their word that they’re interested in fostering more consensus than we had on the July proposal. I’ve tried to be constructive by offering up a phased approach that would finalize the less contested aspects of the Endgame standards and then later finalize the rest through future notice-and-comment rulemakings that can develop more defensible rationales for a U.S. implementation.2
“The key point here is that I do earnestly hope there will be a real effort to build consensus on this important rulemaking.”