FDIC’s Hoenig rounds on Europeans over Basel stand-off

Risk USA: Senior US regulator criticises focus on capital neutrality

Thomas Hoenig: opposes weakening Basel III to keep EU on board

Thomas Hoenig, vice-chair of the Federal Deposit Insurance Corporation (FDIC), has criticised European regulators for seeking to dilute the final round of Basel bank capital reforms. A commitment to avoid significantly increasing capital requirements will not help to strengthen the industry, he argued.

"The Basel Committee's current mandate to achieve capital neutrality requires adjustments unrelated to safety and soundness – and to what end? It is not designed to capture risk in the assets subject to weighting, but rather to ensure that capital requirements for the industry remain unchanged. This proposal does nothing to improve the stability of the global financial system; it only weakens it, and it does not promote long-term growth," Hoenig said in a speech at the Risk USA conference in New York on November 9.

Regulators in the US and Europe have been locked in a stand-off since September over the role of risk-weighted assets (RWAs) in the Basel framework. Banks with approval to model their own capital requirements do so by calculating RWAs, against which the minimum capital ratio is applied; other banks calculate RWAs by applying a cruder, regulator-set standardised approach, which often generates higher numbers.

US authorities are said to be strong advocates of flooring modelled RWAs at some percentage of the applicable standardised approach – a stance the Europeans oppose. The Bank of England is also leading efforts to allow banks to net client clearing margin against exposures in the leverage ratio – the parallel simpler capital framework – which Hoenig again opposes.

The Basel Committee is due to hold a crunch meeting on November 28–29 to decide on key remaining elements of the post-crisis bank capital architecture. There are indications the European Commission could go its own way on the standards if the US refuses to budge, but in response to a question at the conference, Hoenig said he would be willing to sacrifice global consistency.

"There is talk, as recently as the last day or so, on [Europe's] desire not to see an increase in capital, so that is of some concern. I think that would be wrong and I would hate to see them walk away from the Basel standard, but I would be strongly opposed to weakening the Basel III standard to keep them. It's their choice, of course, and I respect that, but it's also a choice that we have to make in the US among the regulatory agencies to ensure our banks remain strong," he said.

This use of risk-based measures does not justify serving as a supervisory tool for determining loss absorbency in this capacity. Such use has proven repeatedly – and I mean repeatedly – unreliable
Thomas Hoenig, Federal Deposit Insurance Corporation

Hoenig reiterated the FDIC's position: that risk-based measures may not adequately capture the real exposures of banks compared with less risk-sensitive minimum capital requirements.

"To be sure, risk-based analysis can be an important management tool, both for the internal measurement and allocation of economic capital, and for stress testing and performance. However, this use of risk-based measures does not justify serving as a supervisory tool for determining loss absorbency in this capacity. Such use has proven repeatedly – and I mean repeatedly – unreliable."

Hoenig cited instances where banks reported a risk-weighted Tier 1 capital ratio of 14%, but a leverage ratio of less than 3% as evidence that risk-based analysis does not fully capture the picture of loss absorbency within banks.

He added in response to a question: "As a supervisor, I have one interest: how much can you stand to lose before I have to take you over, pay off insurance, pay off depositors, do the bail-in, do the bailout and save the economy. That's expensive, and that's what we need to be thinking about."

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