Haldane attack on inconsistent Basel risk rules

Tim Wallace
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THE BASEL rules on bank capital levels are “built on the shakiest of foundations,” the Bank of England’s Andy Haldane warned yesterday, arguing that banks have too little certainty in how to risk-weight their assets.

The official also told MPs and peers that insurance rules are similarly poorly designed, bank bondholders should get votes like shareholders do, and that banks should be threatened with full separation if the ringfence fails to improve behaviour in retail units.

And the director of financial stability warned the Bank of England itself needs to become more accountable to parliament, in a move that shows disagreement with other senior Bank figures, including outgoing governor Sir Mervyn King.

That suggests senior staff are gaining confidence to speak out against Sir Mervyn’s management, and, combined with three critical reports out last week, points towards a shake-up of Bank governance under the new leader next year.

“Basel III is a big improvement on Basel II, but both are built on the shakiest of foundations,” he told the Parliamentary Commission on Banking Standards (PCBS).

“The denominator of the capital ratio is a measure of a assets, weighted by risks, which the banks have done the weighting for.”

“The range of capital held for the same asset can differ by a factor of three or four or more between banks. As long as those inconsistencies exist, Basel III faces fundamental problems.”

Haldane also said regulators should force banks to clean up their operations – arguing that the moves to put retail and investment operations at arm’s length from one another could be made even more extreme, splitting banks in two if they do not behave as he wants.

“The ring fence will need to be patrolled whatever height and wherever it is put, to ensure full implementation of both the letter and spirit of the rules,” PCBS chairman Andrew Tyrie told City A.M. “That will mean the Commission will want to examine whether some further statutory support is required.”

Haldane also argued that the technological capability now exists for a radical shift to a utilities model of banking. He wants all deposits held in one location, with banks servicing customers who are free to shift from one to another, in the same way as energy electricity and gas firms operate.