Mervyn King Says Bank Reforms Must Go Further Than Basel III
(RTTNews) - The Basel III framework of financial reform, which raises the capital requirement of banks, is not enough on its own to prevent another financial crisis, and more needs to be done to improve the resilience of the banking sector, Bank of England Governor Mervyn King said on Monday. In a speech at the Buttonwood Gathering in New York, King called for more "radical" measures alongside Basel III to curb excessive risk taking by banks.
"[Basel III] is certainly a step in the right direction and we should all welcome it," he said. "But if it is a giant leap for the regulators of the world, it is only a small step for mankind."
Additional measures could include a permanent levy on banks - as the one recently introduced in the U.K. - much higher levels of capital requirements and breaking up retail and investment banks, said King.
"The guiding principle of any change should be to ensure that the costs of maturity transformation - the costs of periodic financial crises - fall on those who enjoy the benefits of maturity transformation - the reduced cost of financial intermediation," he said. "All proposals should be evaluated by this simple criterion."
King said Basel III alone will not prove to be the "silver bullet" in upholding financial stability and that it needs to be complemented with more "radical" measures.
"The difficulty of identifying and calibrating the difference between the private and social costs of maturity transformation means that there is merit in having a basket of different measures to rein in excessive risk-taking," he said. "In the area of financial stability, it makes sense to have both belt and braces."
The Basel III reforms require internationally active banks to hold a minimum 7% of assets as common equity - significantly higher than the international standard of 2%. This includes a special capital buffer of 2.5% to withstand future periods of stress in financial markets.
Other, more radical reforms, said King, could include moving to capital requirements substantially higher than that stipulated by Basel III; ensuring there are large amounts of contingent capital in a bank's liability structure; or having some form of functional separation.
At the same time, the Bank of England chief cautioned against sprialing into ever more complex and costly regulation to keep pace with financial innovation.
"Regulators will never be able to keep up with the pace and scale of financial innovation," said King. "Nor should we want to restrict innovation. But it should be undertaken by investors using their own money not by intermediaries who also provide crucial services to the economy, allowing them to reap an implicit public subsidy."
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