A US call for simpler capital ratios and to scrap Basel III

Two US Senators on the Senate Banking Committee, Sherrod Brown (Democrat) and David Vitter (Republican) have sent a letter to the issuers of the latest US Basel III Notice of Proposed Rulemakings authors (Bernanke, Curry and Gruenberg) urging a dramatic simplification of capital rules. They want to see Basel III’s capital requirement basically scrapped with a sole focus on bank equity and leverage ratios. The amount of actual capital that banks hold is what protects them against losses. Dramatically raise that figure and the banking system will be much safer. Incidentally, raising the amount of equity that banks must hold would be a tremendous boon to community banks. A summary of their letter, which echoes comments from FDIC Board Member Tom Hoenig and the Bank of England’s Andy Haldane (see our review of Haldane’s very smart paper from early September, 2012 here), is below.

Amidst growing calls from noted banking regulators and the nation’s community banks, U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) are urging the U.S. banking agencies to simplify and strengthen new bank capital standards. With the U.S. beginning to implement the Basel III international capital standards, Brown and Vitter urged the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC to abandon the overly complex approach of the Basel II accord, and to focus on higher and more loss-absorbing capital buffers. Recently, Tom Hoenig of the Federal Deposit Insurance Corporation (FDIC) and Andy Haldane of the Bank of England have called for such action.

“Wall Street banks have become too large, while their capital requirements are too small. And both these institutions and their rules are so complex that no one—not their executives, nor their shareholders, nor their regulators—truly understand their financial health,” Brown said. “It is essential that banks fund themselves with more pure equity, so that taxpayer dollars are not on the line, and capital rules should be simple enough that banks of all sizes can understand them.”

“This is not complicated finance. If a huge bank wants to provide loans and investments for billions of dollars, then they should be required to keep a certain amount of reserves on hand to absorb any rapid or sudden market turns,” said Vitter. “They certainly shouldn’t empty their bank vaults, fail and then turn to the federal taxpayer for a bailout because they didn’t keep some emergency savings. Louisiana families certainly have to keep emergency savings – why shouldn’t these megabanks?”

In August, Brown and Vitter, who are both members of the Senate Banking Committee, sent a letter to the Federal Reserve urging the agency to raise the capital requirements for the largest megabanks, in order to alter the incentives of “Too Big to Fail” megabanks.

The full letter is here.

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