Basel III capital requirements should go further

In his speech at the Cass Business School on Wednesday, FSA chairman Adair Turner announced that Basel III capital requirements should be set much higher.

FSA chairman Adair Turner says Basel III capital requirements do not go far enough and should be set much higher.

In his speech at the Cass Business School on Wednesday, Turner warned that the measures outlined in Basel III may not ensure financial stability as intended.

He said: “The world’s regulatory authorities – central banks and bank supervisors – thought that they had it right when they agreed Basel II, and that was clearly wrong. So have we got it right? Are we being radical enough? And do we understand the root of this financial crisis?”

He acknowledged the Basel III capital requirements were a major step forward but suggested that capital levels should be set higher than the 7% proposed under Basel III.  The regulatory standards require banks to hold 4.5 per cent of core tier one capital and by 2019 also to hold a 2.5 per cent counter cyclical capital buffer.

Turner backed Monetary Policy Committee member Professor David Miles who suggests setting equity capital requirements instead at between 15% and 20% of risk weighted assets.

Turner agreed with the need to resolve the “too big to fail” regulatory dilemma but said that this would not be enough to ensure financial stability. He also argued that regulators must recognize that financial instability is caused by investor irrationality and the complexity of the financial system, as well as by more well publicized issues such as banking structures and bonuses.

He confirmed the Financial Stability Board’s recommendations for monitoring shadow banking, including the regulation of minimum margin requirements in repurchase agreements and other secured financing markets.

“Many of the measures we could take to increase stability – such as higher capital requirements against trading activities or against intra-financial system complexity – might well reduce the scale of trading activity and the liquidity of some markets,” he said.

Turner suggested four policy implications, including the need for an equity capital surcharge for systemically important banks and the importance of monitoring developments in leverage and managing the relationship between banks’ liabilities and assets more effectively.

He also said there is a need for flexible policy levers which can be adapted throughout a cycle, rather than adopting a fixed set of rules to ensure stability.

Turner acknowledged the necessity to recognize that the risks taken by banks cannot be divorced from their “social value” to wider society.

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