By Cho Jin-seo
The chief of the global banking reform initiative warned Friday that the world’s banks should not take the new banking supervision rules too lightly, ahead of a critical meeting next week.
Nout Wellink, the chairman of the Basel Committee on Banking Supervision, and other top regulators of the world sprayed a cold shower on the banking industry’s increasingly apparent complacency over the G20 financial sector reform efforts. At a conference held in Seoul, Wellink said that bankers are too naive if they think that the so-called Basel III reform is not going to be so harsh on them as previously expected.
“When people are relaxed, I feel happy. So when bankers are relaxed, I will be happy too. But they should be relaxed for the right reasons,” he said at a news conference. “To some extent, my feeling is that they don’t fully understand how tough the program is...... I am always happy when others are happy, but only when they realize what they are happy about.”
The remark from Wellink, who is representing the Basel Committee as chairman and is also the governor of the Dutch central bank, is a rare criticism of the complacency fast spreading in the financial sector. The committee is to have a meeting next week in Switzerland to agree on the definition of “capital ratio.” Depending on the committee’s decision, big banks may need to secure billions of dollars in equity to meet the capital standard.
The Basel Committee is a gathering of central bankers and financial supervisors of major economies. It is one of three core institutions behind the G20 financial reform initiative, along with the Financial Stability Board and the International Monetary Fund.
Throughout this year, the G20 and the Basel Committee have been put under criticism for gradually becoming lenient about banking sector reform. Many suspect lobbying from the industry is influencing their decisions. Some market analysts now project that most major global banks can meet the new standard without seriously altering their business model or funding practices.
“Pressure for reform is inversely correlated with the distance from the crisis. I am worried that the pressure for reform is gradually dissipating,” Avinash Persaud, chairman of Intelligence Capital, summarized such concerns at the same conference.
Martin Wolf, a journalist from The Financial Times newspaper of the United Kingdom, supported Wellink in the G20 and Basel Committee’s commitment for a safer world. But he also demanded that the regulators themselves should not get complacent. Banks, and bankers will try to take “regulatory arbitrage” by finding loopholes in the Basel III system no matter how harsh the new rules are, he suspected.
“I think if banks really understand the changes, they should be very unhappy. I would like to see this misery,” he said. “However, we do have to understand that the financial sector is filled with very well motivated, well remunerated people who want to shift the risk to outside of the banking system to a ‘shadow banking’ system, just like we have witness in the build-up of the last financial crisis.”
Meanwhile, Wellink said that Basel III is likely to be the official name for the set of new capital and liquidity requirements.
“I would love to get a suggestion for another name, but unfortunately it is established as such,” he said.
He also said that the recent discussions of whether the global economy is heading for a “double dip” recession is “completely irritating and irrelevant” to the committee because they are more focused on a longer-term prospect of the economy.
The discussion on global financial reform will continue this weekend in Gwangju, four hours south from Seoul, at the G20 deputy ministers’ meeting. It is not open to the press.