TOUGH new rules forcing banks to hold more capital in the wake of the financial crisis may be too complicated to work effectively and so could be simplified, top regulator Stefan Ingves said yesterday.
The rules have come in for criticism because they make it hard for investors to judge how well capitalised banks are relative to each other, and because the complexity of the rules could create perverse incentives by allocating inappropriate risk weightings to certain assets.
Ingves also said the regulators could look at making banks hold more capital against interest rate risk, adding further to their costs.
“Examining the comparability of model-based internal risk weightings and considering the appropriate balance between the simplicity, comparability and risk sensitivity of the regulatory framework” is one of the key tasks ahead, the boss of the Basel Committee on Banking Supervision explained. The reconsideration comes after regulators including the Bank of England’s Andy Haldane warned the complexity could be counterproductive.
Much of the problem revolves around the self-assessment of risk weightings which allows the biggest banks to decide how much capital they should hold against assets.
That has led to fears from the Bank of England that some are not holding enough, while investors fear they cannot properly compare banks against each other, while smaller lenders are angry they have to use a standardised model which leaves them holding far more capital against exactly the same assets.
As a result of criticisms including these, the Basel Committee has launched “a review of the standardised (credit and operational risk) approaches to capital adequacy, which need to be re-examined in light of calls for greater simplicity and comparability in the regulatory framework as well as the desire to reduce the reliance on credit rating agencies if possible.”