Andrew Crockett, president of JP Morgan Chase International, said the current gaps in Basel II's regulatory capital requirements makes it essential the accord evolve toward a Basel III. He outlined two proposals that could pave the way.
First, make large institutions issue a minimum amount of subordinated debt, he said. The price of debt in the secondary market will be an index of confidence in risk management at the institution concerned.
His second suggestion is for a pre-commitment of capital. Crockett suggested banks make estimates to cover value-at-risk and said banks with insufficient estimates should be penalized. This provides banks with a financial incentive, he explained.
"This is my view of the direction we will find ourselves moving in the next five to 10 years," he said, adding the proposals would bring about a more market based approach that gives counterparties additional information and incentive to take on greater responsibility.
