I have long been deeply concerned about the
Beginning in the 1980s, the Bank for International Settlements, or BIS, a central bank for central banks, began promulgating capital rules imposed globally. For those who do not know, which is most of us,
Up to and during the 1970s, there was little coordination among bank regulators about supervisory standards and rules, even in the U.S., much less among nations. Peter Cooke, now deceased, who served as head of bank supervision for the Bank of England, began a group of international bank supervisors in 1977 called "The Cooke Committee," which was the precursor of what was to become the Basel Committee. I respected Peter Cooke and his vitally important mission of enhancing communications and coordination among financial regulators across the globe.
I thought, and still believe, it was inappropriate for BIS to set capital standards for the major global banks for several very important reasons. First, the rules produced by BIS result from compromise among various nations and are weaker than strong nations like the U.S. would produce on their own. Second, the compromise process is slow and burdensome, requiring some ten years each for Basel I, II and III to be developed. Finally, because Basel is central bank centric rather than bank regulator centric, the focus is on allowing and encouraging the development of a handful of "too big to fail" banks.
The all-stock transaction is slated to close in the second quarter of 2025. It would create a bank with more than $15 billion of assets.
The original capital rule — Basel I — was being discussed when I was chairman of the Federal Deposit Insurance Corp. in the early 1980s. It was nearing completion when I left the FDIC at the beginning of 1986. I declined to act on Basel I at the FDIC because I believed the U.S. should adopt its own rules on capital adequacy, not a watered-down uniform version approved by countries with very different financial and regulatory systems and generally weak prudential standards. Had I remained at the FDIC, the agency would never have become a signatory to Basel I, II or III.
I believed firmly — and still do — that eventually the countries with the best and strongest banking system would prevail in the global marketplace. During the 1980s, Japan had a weak bank regulatory regime, and 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 adopted Basel I and II with the U.S. being the laggard on Basel III, currently under debate. The plain and clear truth, over the life of Basel, 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 fast 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 of the Cooke Committee 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 the Cooke Committee under the auspices of the BIS, so be it. But let's get Basel out of bank regulation, at least in the U.S.
