Bank Regulators Should Toss Basel: Hoenig

FDIC board member suggests regulators go back to using straightforward leverage ratio.

Global bank regulators should scrap Basel capital rules and go back to using a straight-forward leverage ratio to reduce risk in the financial system, Federal Deposit Insurance Corp. board member Thomas Hoenig said.

The Basel Committee on Banking Supervision, which brings together regulators from 27 countries including the FDIC and three other U.S. agencies, revised global capital rules in 2010. The new regulations, which go into effect next year, will tighten the definition of what counts as capital, increase banks’ minimum ratios and tighten how risk is defined in calculating those ratios.

‘Startling’ Complexity

“Where the markets assess, demand and adjust intrinsic risk weights on a daily basis, regulators using Basel look backward and never catch up,” Hoenig said. “People knew well in advance of the recent financial crisis that the risk on home mortgages had increased during the period between 2005 and 2007, yet no changes were made to the risk weights.”

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