LONDON (MNI) – The newly agreed Basel III accord will only work if
banks stick to the spirit of the regulations, not the letter, and do not
start finding ways of watering down the capital requirement rules,
according to a top Bank of England official.
Andrew Bailey, the BOE’s Executive Director for Banking Services,
warned in a speech Tuesday of the risk of banks getting round the spirit
of the Basel III rules by ‘regulatory arbitrage’ and
‘quasi-innnovation’ on capital.
The driving force behind Basel III is to force banks to have
adequate capital to cover any losses other than catastrophic ones.
“The new Basel agreement emphasises loss-bearing capital – capital
that can bear losses outside insolvency. It must stay that way, and not
be chipped away under the banner of arbitrage masquerading as
innovation,” Bailey said in a speech at the Lord Mayor’s City Banquet
here.
“I have been asked a number of times in the last week whether I
think that the new Basel agreement sets capital requirements high
enough. My answer is that if the capital buffers are in future genuinely
loss-bearing capital with no tricky wrinkles, and we keep to this
outcome, we have taken a good step forward,” Bailey said.
Bailey said regulators must use their discretion and be ready to
“mount a robust challenge to stop dangerous business models and
investment practices.”
He warned “financial services is an industry where arbitraging
rules and regulations is habitual, even addictive.”
“Doing the right thing and preserving financial stability means
accepting the spirit of the rules,” Bailey said.
–London newsroom: 44 20 7862 7491; email: drobinson@marketnews.com
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