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By Frank Keating, ABA President and CEO
Just when there appears to be some agreement on international capital standards, U.S. regulators are proposing to undermine the whole exercise under a mistaken belief that doubling capital requirements will have no impact on credit availability or the ability to hedge risk. If Basel III had a fundamental purpose and we certainly criticized its details it was to create a basic global standard that would end international competition over capital levels. This proposal goes beyond Basel III to impose a more difficult standard on our nations internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans -- including loan commitments and derivatives that hedge risk -- more expensive to offer. Raising capital is not without cost it means higher funding costs for loans and that fewer loans will be made.
Americas banking sector is at near historically high capital levels. The Federal Reserves stress tests clearly demonstrated that our nations banks are strong enough to withstand even the most challenging economic circumstances with the capital they currently hold. Doubling the capital requirements adds little protection, and may adversely affect the level and cost of credit thats so vital to continued economic expansion. While risk-based capital standards can never perfectly reflect the underlying risk, it makes no sense to go to the other extreme and ignore all the risk. This is exactly the opposite of what regulators should be doing to create the right incentive for banks to manage risk.
Regulators should exclude, for example, safe assets banks hold for liquidity such as U.S. treasuries or reserves held at a central bank. Risk-based capital remains an important way to gauge and guard against the true risks associated with an institution, considerations that are lost by reliance upon a one-dimensional leverage ratio. We need both measures, well-balanced.
The American Bankers Association represents banks of all sizes and charters and is the voice for the nations $14 trillion banking industry and its two million employees. Learn more at aba.com.
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