Basel III will not be enough, warns King
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Mervyn King, governor of the Bank of England, has warned that the higher capital requirements in Basel III will not act as a silver bullet and prevent another financial crisis.
In a speech in New York last night, King told the audience that as with the bank levy, Basel III alone will not prevent another financial crisis and there needs to be a basket of measures.
He says : “Basel III is seen by some as the answer to the failure of regulation to prevent the financial crisis. It is certainly a step in the right direction and we should welcome it. Although it is a giant step for the regulators of the world, it is only a small step for mankind and Basel III on its own will not prevent another crisis.”
King says in 2007 Basel II was based on a judgement that mortgages were the safest form of lending irrespective of how they were financed.
He adds: “Basel II excluded consideration of the liquidity and liability structure of the balance sheet, so much so that when the UK adopted Basel II in 2007, of all the major banks the one with the highest capital ratio was, believe it or not, Northern Rock.”
But within weeks of announcing that it intended to return excess capital to its shareholders, Northern Rock ran out of money.
Banks have up to 2019 to adjust to the new requirements and King says the bank has no intention of asking banks to adopt a faster timetable for implementation as it does not expect to change the financial system overnight.
King believes some of the calculations of the alleged economic cost of higher capital requirements presented by the industry seem to be exaggerated.
He says: “I do believe that it is important in the present phase of de-leveraging not to exacerbate the challenge banks face in raising capital today.
“Banks should take advantage of opportunities to raise loss-absorbing capital and should recognise the importance of using profits to rebuild capital rather than pay out higher dividends and compensation.”
King says the answer to preventing another financial crisis is likely to be simple.
He says: “Banks should be financed much more heavily by equity rather than short-term debt.
“Much, more equity and much less short-term debt. Risky investments cannot be financed in any other way.”
He says what we cannot countenance is a continuation of the system in which bank executives trade and take risks on their own account and yet those who finance them are protected from loss by the implicit taxpayer guarantees.
He adds: “Of all the many ways of organising banking, the worst is the one we have today.”
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