Leading figures in the global banking industry appeared divided on Friday over the controversial new Basel III rules at aimed at dealing with the failure of the largest financial institutions.
Since the collapse of Lehman Brothers in September 2008, regulators and bankers have been at odds over how - or whether - to deal with institutions that are seemed too big to fail (TBTF).
Thomas Hoenig, a member of the board of directors at the Federal Deposit Insurance Corporation (FDIC), which guarantees the safety of deposits in US lenders, was adamant that the survival of even the largest financial institutions should not be sacrosanct.
“If we are to have a vigorous financial system we need one [in which banks] are allowed to fail,” he said, adding that unfortunately “that situation still remains ahead of us”.
Some bankers recognized that politicians might struggle to permit banks to fail outright, in the case of a repeat of the 2008 financial crisis. “That [issue] is the elephant in the room,” Mike Smith, chief executive officer at Australia and New Zealand Banking Group, told Emerging Markets.
“Would governments be willing to accept the managed failure of a key financial institution, or would they feel that a bank failure would be just too hard (on a given economy)?”
FDIC’s Hoenig highlighted the difficulty of regulating an industry that, despite the stresses of the past four years, retains an almost mesmerizing hold over many regulators and politicians. “Some of these institutions are dramatically larger than they were [five years] the FDIC director noted. “So...there will be a very strong incentive for governments to bail out their banks in the future, given their structural importance to an economy.”
Besides, Hoenig added, there was “no amount of capital out there [in the world] that will save a bank from bad management. We assume that Basel III will minimize risk. Well, it won’t. Banks will use the new rules to the advantage in the long run. Basel III won’t solve all crises or solve all problems.”
Bankers were also concerned by the growing weight of regulations they had to deal with, saying they felt under enormous pressure to impose fresh financial regulations set to come into effect from 1 January.
“Over the past six years, we have made huge progress” as an industry, said Anshu Jain, co-chairman of the management board and group executive committee at Deutsche Bank.
“Leverage ratios have been cut in half while capital levels are around six times higher than they were before the financial crisis.” Yet despite these improvements, he complained that new rules were throttling banks.
“We continue to get a new set of regulations every week, five years on from the financial crisis,” he sighed. “No one likes Basel III.”
Jain admitted more needed to be done by banks to protect both investors and governments from effects of complex financial instruments like over-the-counter (OTC) derivatives.
And he noted that the industry needed to be careful not to be dragged back into a situation where too few banks controlled too much of the credit markets.
Pointing to Britain, still struggling to recover from the events of four years ago, he said “one reason the credit crunch was so bad” there was because more than 40% of the industry was in the hands of lenders like RBS, now controlled by the state.
“That level of market saturation [by so few lenders] was just too concentrated. We can’t have systems like that. We need more diversity.”