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U.S regulators' knack for going beyond international standards is prompting industry worries over the cumulative effect of different jurisdictions' capital regimes.
January 7 -
The Federal Reserve issued a proposal Monday outlining a framework to implement a countercyclical capital buffer for the largest and most internationally active banks, a key part of Basel III that has until now lacked any details.
December 21 -
The Financial Stability Board finalized a standard Monday that will require 30 of the worlds largest banks to hold a combination of debt and equity that could be used to absorb losses and facilitate a resolution if one of them were to become insolvent.
November 9
WASHINGTON — It's beginning to look like the rest of the world may follow the U.S.' lead when it comes to tougher capital standards.
An international regulatory body said this week it is looking at setting new, enhanced leverage ratio requirements for the largest global banks, a move that echoes the higher standards in the U.S.' supplemental leverage ratio and demonstrates why going beyond international accords can influence the rest of the world.
Wall Street critics say it illustrates their longstanding claims that "gold-plating" — that is, setting regulatory standards that exceed international standards — can help influence other countries to agree to stronger standards.
"The international financial regulatory bodies work on consensus, and because of that, you basically have to win the argument," said Dennis Kelleher, president of financial reform group Better Markets. "The [Financial Stability Board] is made up of a bunch of very senior, sophisticated financial experts who are listening to, analyzing and weighing the merits. And they have done that and come to the conclusion — in this case — that the United States had the better argument."
Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloane School of Management, said the language is an indication that world leaders outside of the U.S. and similarly-minded countries like the United Kingdom, Sweden and Switzerland remain concerned that the size and complexity of the largest internationally-active banks.
"I don't think anyone should conclude that the G-SIB process is over at the international level," Johnson said. "The international community of regulators are looking at this and saying, 'We still have a pretty big issue here.'"
The Group of Central Bank Governors and Heads of Supervision — the overseeing body of the Basel Committee on Banking Supervision — said in a release Jan. 11 that it has endorsed several new initiatives, including a final design and calibration of the leverage ratio. The new ratio will remain at the previous 3% minimum of Tier 1 capital, but that the group "discussed additional requirements for Global Systemically Important Banks."
"The agreements reached today provide greater clarity on important elements of the risk-based framework and the leverage ratio, and a clear path for completing post-crisis reforms," said Mario Draghi, chairman of GHOS and President of the European Central Bank.
Critics of the banking industry have long said that U.S. regulators should subject banks — particularly the largest, most complex banks — to greater scrutiny than those stipulated in the Basel minimums. Industry groups, meanwhile, have
But supporters of gold-plating say that fear is misplaced, and that regulators should be striving to make the financial system safer and sounder across borders, rather than settling for the lowest common denominator (literally, in the case of capital ratios).
Mayra Valladares Rodriguez, managing principal at MRV Associates, said that the U.S.' position as the largest economy in the world and the host to eight of the largest banks means it has a heightened responsibility to ensure the health and well-being of the global economy. Gold-plating, therefore, is not some zealous or punitive add-on, but rather a sober reflection of the heightened risks that U.S. regulators are tasked with offsetting.
"The United States needs to lead by example," Rodriguez said. "We should not be dumbing down. We're still the largest economy in the world. We still have some of the largest banks in the world. We should be leading."
The regulators themselves have made similar points as they have rolled out their enhanced rules. Fed Gov. Daniel Tarullo said in July that the central bank's enhanced G-SIB surcharge rule — which set a higher capital surcharge on banks that relied on short-term wholesale financing — "reflect[s] the relatively new, but very significant, principle that the stringency of prudential standards should vary with the systemic importance of regulated firms." Tarullo also noted in a speech in November that that same principle applies to regulators' responsibilities to the markets that lie within their jurisdictions.
"For host countries, the overarching guideline is that each jurisdiction should take responsibility for protecting the financial stability of its own markets as its contribution to achieving global financial stability," Tarullo said. "The extent of this responsibility obviously increases with the size and significance of the jurisdiction's financial markets."
But Karen Shaw Petrou, managing principal of Federal Financial Analytics, said that the U.S. was not alone in pushing for tighter capital rules on G-SIBs — it is joined by other regulatory hawks in the FSB, including the U.K., Sweden and Switzerland, who have also staked out more stringent rules than what the Basel committee suggests.
"In this instance I wouldn't put it down solely to the U.S., but certainly the U.S. was a very important voice in favor of the leverage requirement," Petrou said. "Could the U.S. have done this on its own? I don't know. It certainly would have been harder."
Johnson said a country's stance on regulatory stringency — particularly as it relates to capital ratios — generally boils down to differences in each country's appetite for backstopping its banks with government funds.
In the U.S., the U.K., Sweden and Switzerland, each of those governments experienced serious crises that forced them to intervene drastically in their banking sectors. Those experiences have strongly influenced their preference for high capital standards that might prevent such an intervention from ever being necessary again. But in countries like China, Japan, France and Germany, the government and public are more sanguine about government intervention or nationalization and prefer lower capital rules that reflect that preference.
"If you're more readily willing to provide a state guarantee to a big bank, you don't worry as much about capital because you know there's a contingent call on the state and you know the state's good for it," Johnson said. "If your state is weaker, you don't have the balance sheet or the banks are much bigger relative to the state, you want to be more careful."
But the regulatory hawks are not always a prevailing force on the Basel Committee or any other international deliberative body, Petrou said. In addition to the leverage ratio, the GHOS statement said that it was going to re-propose an initiative to set floors for internal credit risk models, a move that Petrou said was a "significant concession" to the regulatory doves on the committee.
"It's a balanced package in which the capital hawks won some, the capital doves won some," Petrou said. "The doves clearly, in my opinion, won off on the floors."
