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BoE’s Haldane: Basel III does not go far enough

Bank of England executive director of financial stability Andrew Haldane says the capital requirements placed on banks under Basel III may not be enough to stave off another banking crisis.

Under Basel III, banks will be required to hold a minimum of 7 per cent core tier one capital.

Speaking at the Wincott Annual Memorial Lecture in London yesterday, Haldane said: “The average risk weight for a global bank is 40 per cent. This means that a 10 per cent capital ratio in risk-weighted terms translates into bank leverage of 25 times equity. So even once Basel III is in place, an unexpected loss in the value of a bank’s assets of 4 per cent will be sufficient to render it insolvent, much less than that to render it illiquid.

“For me, that argues for bolstering further banks’ capital defences over the medium term. Basel III is a good starting point, but may not be the right finishing line.”

Haldane also argued that behaviour in the financial system would improve if banks had different performance-based pay structures.

He said: “The behaviour of the financial system would be improved by an alternative set of performance metrics. The ideal metric would be less focused on a narrow subset of the balance sheet, such as equity, and do a better job of adjusting for risk, than ROE. One metric satisfying those criteria would be return on assets.

“This covers the whole balance sheet and, because it is not flattered by leverage, does a better job of adjusting for risk.”

Bank of England Monetary Policy Committee member Martin Weale has warned the British economy may already be contracting.

Speaking to Channel 4 News, he said: “I certainly do think the underlying rate of growth of the economy is weak now and I would not be terribly surprised if we were to see output contract in the fourth quarter.”

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  1. The higher the basic capital requirements are the more will the arbitrary risk-weights imposed by the regulators distort… and that is what Mr. Andrew Haldane, and his colleagues seem unable to comprehend… and that is why they are only digging us deeper in the hole where they placed us.

    PS. If you allow it, here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

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