The world’s bankers are concerned that efforts to crack down on overleveraging and excessive risk taking, which helped usher in the global financial crisis three years ago, could go too far. This week, the trade group representing some 430 banks in 70 countries – the Institute of International Finance (IIF) – said it supports stricter regulation by experienced regulators, but that “supervision should not be about shadow-running firms or second-guessing all decisions,” a report in the Financial Times this week noted.
At the end of June, the Basel Committee on Bank Supervision announced it would add an additional capital charge of 1% to 2.5% of risk-adjusted assets on the largest banks as protection against huge bank losses that could spark another financial meltdown. That means that banks deemed the most systematically important – most likely the eight largest global institutions – will have to hold core tier one capital of about 9.5% of their risk-weighted assets, though they have until 2019 to meet the full requirement. That is at least two percentage points above pre-crisis requirements, and specific requirements could vary some depending on financial conditions.
While the IIF noted in its press statement this week that “macroprudential authorities need to monitor the shadow banking system and stand ready to respond if risks arise,” it also warned against relying too much on strict capital requirements: “Authorities should avoid over-reliance on a single macroprudential tool such as capital, and should be flexible…..”
Some analysts have warned that even if all of the rules being considered by the Basel Group and national regulators in the U.S. and elsewhere are implemented as proposed, the result is unlikely to offer strong enough protections to prevent a future financial meltdown similar to the most recent one.
More generally, commenting on whether or not the main lessons of the financial crisis have been learned, Wharton professor Richard J. Herring has noted the following in a Knowledge at Wharton video series on banking sponsored by Ernst & Young: “I think the jury is still out, quite frankly. The Fed is actually, through its policy, trying to push not only banks but investors into taking riskier bets in the interest of regenerating the economy. But the spreads you used to see between junk bonds and treasuries have come way, way down to before-crisis levels. You are beginning to see bonuses that look like pre-crisis levels…. It’s not at all clear to me that we have seen fundamental changes in the way these institutions are run. That may happen as the regulations click in. But so far, I’m not persuaded that we have learned much of anything.”
The latest video on the banking industry, done in collaboration with Ernst & Young, is the just-released Putting Together the Global Banking Puzzle. Other videos in the series include Regulatory and Growth Challenges and Banking: The Road Ahead.