A simple approach to reining in risks at banks would fail to capture the complexity of modern day lenders, a top global regulator said.
Wayne Byres, secretary general of the Basel Committee, said on Wednesday that relying on a single, simple indicator to capture all risks was asking too much.
The committee is a global forum of central bank and banking supervisors which wrote the Basel III rules on bank capital that are being phased in from January and have being criticized by British and U.S. supervisors for being too unwieldy to work.
Basel III is the world's regulatory response to the financial crisis, forcing banks to triple the amount of basic capital they hold in a bid to avoid future taxpayer bailouts.
"Pilots do not focus on a single dial in the cockpit when they fly. Instead, a range of instruments, designed to give them a broader context and perspective, provides much greater information content," Byres told a conference in Portugal.
Thomas Hoenig, a director of the U.S. Federal Deposit Insurance Corp, which regulates some banks, said in September the United States should reject Basel III because it was too complex and based on subjective judgment calls.
And Bank of England director of financial stability and Basel Committee member, Andrew Haldane, said in August that Basel needed a rethink as it may be too complex to work.
Paul Tucker, the BoE's deputy governor, said last week Basel III relied too much on a "risk-based approach" whereby banks use internal models to calculate how much capital they should hold.
This over-reliance on internal models was unsafe and he called for simpler approaches such as a floor on the actual amount of capital a bank must hold, irrespective of the figure internal risk models come up with.
Britain's top banks supervisor, Andrew Bailey, said this week he will require banks to have a conservative bias in their internal models and he would change models that underestimated capital requirements.
Byres said the Basel rules reinforced a risk-based approach with safeguards such as far higher basic capital requirements, new liquidity buffers and a leverage ratio or balance sheet cap.
"Even if calibrated to an appropriate level for the average bank balance sheet, a simple capital-to-assets ratio will, on its own, create incentives for banks to undertake riskier activities and reduce their less risky activities," he said.
"We also have seen in the past that simple measures can be easily arbitraged - the growth of off-balance sheet business, particularly prior to the advent of the risk-based regime, was one manifestation of this tendency," Byres said.
It was "highly unlikely" the 2007-09 financial crisis, which saw banks having to be rescued by taxpayers, could have been avoided altogether with a better set of bank capital rules, Byres said.
"The point I would make is that a corner solution of either extreme complexity or absolute simplicity will almost inevitably be suboptimal - like most things in life, we need to find a balance between the two."
(Editing by Dan Lalor)
Copyright 2012 by Reuters. All rights reserved.
Copyright 2014 Thomson Reuters. Click For Restrictions