BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Banks

Haldane calls for rethink of Basel III

Posted on August 31, 2012

Andrew Haldane

Bank regulators should tear up the overly complicated Basel III rule book and return to a few simple standards on capital and total borrowing, a senior Bank of England official has said.

In a radical speech to central bankers at Jackson Hole in Wyoming on Friday, Andy Haldane, executive director for financial stability at the BoE, warned that the complexity of current regulation is preventing authorities from spotting and averting financial crises.

    “Modern finance is complex, perhaps too complex . . . As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity. Less may be more,” Mr Haldane said.

    The annual gathering, sponsored by the Federal Reserve Bank of Kansas City, is considered one of the prime intellectual events worldwide for central bankers, making it the ideal audience for Mr Haldane’s bold call for a radical rewrite of the rules. Mr Haldane’s boss at the BoE, Sir Mervyn King, is chairman of the global body that approves updates to the Basel global standards for bank safety.

    Mr Haldane called for regulators to simplify the way banks calculate their capital requirements as a first step. He pointed out that the Basel rules have grown from 30 pages in the 1980s to 616 pages in the Basel III version approved in 2010.

    The rules now rely heavily on banks’ internal models to make millions of calculations about the risk levels of individual loans, making it almost impossible to compare banks with their peers. Investors have also grown increasingly sceptical of bankers’ ability to measure risk in the wake of the financial crisis and JPMorgan Chase’s recent multibillion-dollar trading loss. Mr Haldane said their concerns had merit.

    “With thousands of parameters calibrated from short samples, these models are unlikely to be robust for many decades,” he said, calling for regulators to consider “simplified, standardised approaches to measuring credit and market risk, on a broad asset class basis” instead.

    A second step would be to impose tighter curbs on banks’ total borrowing, known as a “leverage ratio”. The Basel III rules require banks to have equity equal to 3 per cent of their total assets as a backstop measure to prevent them from understating the risk levels of their assets when calculating their capital requirements. But Mr Haldane advocated much higher requirements, of 4-7 per cent, saying it would do more to prevent bank failures.

    Both ideas have some support. The Basel Committee on Banking Supervision has raised the possibility of using standardised risk weights in its consultation on capital requirements for bank trading books, and some academics have argued for a much tougher leverage ratio.

    Noting that the BoE had a chance to put some of his ideas into practice when it took over bank supervision next year, Mr Haldane called on bank regulators to be “brave enough to allow less to deliver more”. In practice, that would mean “fewer, perhaps far fewer, more, ideally much more, experienced supervisors operating to a smaller, less detailed rule book”, he said.

    Mr Haldane acknowledged that adopting his ideas “would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years”, but he likened the situation to trying to catch a Frisbee. “To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a Frisbee by first applying Newton’s law of gravity,” he said.