Toronto's financial district.Fred Lum/The Globe and Mail
Canada's top banking regulator is squarely behind the Basel III rules on risk, fighting back against a last-minute attack from some influential, if lonely, policy makers who want to throw out the huge package of reforms in favour of less complex alternatives.
One of the top regulators at the Office of the Superintendent of Financial Institutions is dismissing suggestions the impending Basel III package be scuppered and replaced with simpler measures of bank risk and capital. That comes in the wake of a spirited defence of Basel from Mark Carney, head of the Bank of Canada and the Financial Stability Board, an international watchdog.
The opponents include Andrew Haldane, executive director of financial stability at the Bank of England, and the director of the U.S. Federal Deposit Insurance Corp., Thomas Hoenig. For example, Mr. Hoenig suggested in a speech in September that giving up on Basel and "starting over offers the best opportunity to produce a better outcome." He advocates a basic leverage ratio of tangible equity to tangible assets as the best yardstick, one that could be "simple" and "understandable." Mr. Haldane suggested "less may be more."
And according to OSFI assistant superintendent Mark Zelmer, they are off base. Simple doesn't work when banks are vastly complicated.
"Turning back the clock and scrapping all those fancy risk models in favour of simpler tests is not an option from OSFI's perspective, Mr. Zelmer said in a speech that allied OSFI firmly with Mr. Carney. "Basel capital rules are complex because internationally active banks are complex."
You need both risk-based capital rules and simple leverage tests, he said.
"At the end of the day, setting back capital requirements is not a choice between complex versus simple rules. It is about using both, along with forward-looking risk and vulnerability assessments, to decide how much capital is required so that banks can meet the needs of their clients in a wide range of economic conditions."
That too is in line with the view espoused by Mr. Carney, who was sharply critical of Mr. Haldane's ideas.
In an interview with Euromoney, Mr. Carney said that the first iteration of Basel "was simple and it drove us off a cliff," adding that "Andrew Haldane's conclusions aren't supported by the facts."