Why ‘Back to Basics’ Is the Wrong Answer to Basel

By Karen Shaw Petrou

In recent weeks, policymakers have begun to turn from ever-more detailed revisions of the Basel III capital rules to a dawning awareness that these standards are unduly complex. I hope they also recognize soon that these dizzying rules are dangerously contradictory when taken in context with other pending regulatory initiatives. A cure to this chaotic situation is urgently needed, but it isn’t the “back to basics” approach advocated on Sept. 14 by Federal Deposit Insurance Corp. board member Thomas Hoenig.   To reject all of the risk-based rules in favor of a single tangible-equity to tangible-assets standard, as Hoenig advocated, is akin to abandoning surgery with complex anesthesia for the bite-a-bullet option.  It’s simpler, but a lot more painful. In his address to the American Banker‘s Regulatory Symposium, Hoenig made a forceful case for junking Basel I, II, II.5 and III.  He would, instead, rely on a revised version of the U.S. leverage standard, simplifying it further to the aforementioned tangible numerator and denominator.  This, he argues, will ensure that bank capital is a robust form of risk absorption immune to gaming by “brazen” big banks that use their model-building skills to exacerbate the plight of simpler, better community banks.