Keep Calm and Carry on Banking!





With some of the new Basel III reforms due to come into force as soon as next January, it seems a bit late for one of the most senior figures in British bank regulation to be calling for a major re-think. That is just what Andrew Haldane, the Bank of England’s Executive Director for financial stability, did, however, during a speech to central bankers meeting in the United States at Jackson Hole, Wyoming.

Speaking on Friday, August 31, Mr Haldane criticised the new rules for being too complicated, comparing the Basel accord to the chaos of the Tower of Babel:

“Taken together, the emerging picture is of a steadily rising regulatory tower.

The Tower of Basel is at risk of over-fitting and over-balancing. It may be time to re-think its architecture”.





The Tower of Babel

Rather a weak pun comparing the Basel III framework with the Tower of Babel, I think, and not particularly amusing!  But is the comparison valid?  Did Mr Haldane have a point?

The Tower of Babel featured in a Biblical story from the Book of Genesis.  At that time everyone on Earth spoke the same language, which made communication simple and straightforward. According to Genesis this all changed when the people became over-ambitious and arrogant, building a massive tower which reached right up to the heavens.  God became angry, and to rebuke them for their pride, and to bring them back down to Earth, He afflicted them with a confusion of different languages, or ‘babble’.

Mr. Haldane seems to be implying that the new banking rules suffer by trying to accommodate a large number of disparate voices and opinions, which makes them far too complicated to be robust and effective.  Is the Basel III framework really over-ambitious, over-complicated and unstable?

The Basel III accord came in response to the banking crisis of 2008, and international regulators and world leaders have had to work long and hard to reach an agreement forcing banks to hold more capital.  The aim is to provide a robust financial buffer to protect taxpayers from having to foot the bill for any future bailouts.

His point is that, well-intentioned as they are, the sheer complexity of the new rules may be their downfall. He reckons it will be "close to impossible" to measure default probabilities for a large international lender's banking book and work out how much capital should be set aside.

On the operational side, he believes that the banks may need to employ an additional 70,000 staff and provide up to 50,000 individual data items to the regulators in order to gain Basel III compliance.

Mr Haldane called for moves to simplify and ‘delayer’ the regulations. One suggestion was to place the 3 percent leverage ratio on an equal footing with capital ratios. That would force regulators to rely more on their own judgements and less on banks calculating the size of their capital buffers based on complicated internal risk models. Another way to reduce the complexity of the banks would be to levy a specific capital charge to encourage simpler balance sheets.

I am all in favour of clarity and simplicity, but let’s face it, in the real world; sometimes things just ARE complicated and difficult.  Sometimes we just HAVE TO carry out complex tasks to ensure we have accurately and efficiently functioning systems which are consistent and legally compliant.

From next year the Bank of England will become the main regulator for banks and insurers in Britain.  It is vital that they provide strong leadership and a clear message to the banks that they should be getting ready to implement Basel III.  Keep calm and carry on banking!