Reforms on big banks far from being resolved: experts

21st October 2010, Comments 0 comments

Days before ministers are due to discuss banking reforms during a G20 meeting in Seoul, experts warned that key issues surrounding banks deemed too big to fail were far from being resolved.

Leaders of the Group of 20 developed and developing nations had been aiming to approve new rules to curb systemic risks posed to the economy by big banks, as well as recent banking regulation reforms called Basel III, during a summit in November.

But Nout Wellink, who heads the Basel Committee on Banking Supervision, admitted Tuesday that rules on systemic risks and the biggest banks would not be ready before the middle of next year.

In Brussels Wednesday the European Commission called for the creation of a system to allow troubled banks to fail without jeopardising the financial sector and forcing taxpayers to save them.

European Internal Markets Commissioner Michel Barnier said setting up a crisis management framework to wind down failing banks in an orderly fashion was the most vital element of the reform drive sparked by the financial crisis.

"I am totally determined to do everything in my power, in the name of the commission and Europeans, to prevent taxpayers from again having to pay for the banks," Barnier told a news conference.

"It is the banks that must pay to prevent and repair the damage they might cause," he said.

The issue of systemic risks was exposed during the global financial crisis of 2007 and 2008, when governments were forced to step in and rescue several banks.

Allowing these financial giants to fail could have brought down whole economies.

To prevent a repeat of the crisis, regulators have come up with the Basel III rules to bolster the resilience of banks.

They are also trying to find a way to allow the biggest banks to fail without disrupting economies.

However, experts warned that addressing the second part of the reform -- the question of systemic risks, would prove more tricky.

"The systemic risks will certainly be one of the biggest problems for the governments," said Norman Schuerhoff, professor at University of Lausanne's Institute of Banks and Finance.

Some experts claim that Switzerland offers a possible model to address the problem.

The Swiss model requires UBS and Credit Suisse to hold around 40 percent more common equity and around 80 percent more total capital than Basel III rules.

In case of a threat of failure, it triggers an emergency plan that splits off systematically important functions -- including deposit services, payment transactions and lending business -- of the bank and channels them to a bridge bank, while work begins on winding down the rest of the bank's businesses.

"The British are pushing in this direction, but in continental Europe, this implies putting in question the integrated banking system of certain major groups," said Bernard de Longevialle of Standard and Poor's.

"There is no consensus of major countries of G20 to put in place these proposals of dismantling the banks in case of crisis. To be efficient, it would be necessary to harmonise bankruptcy laws on an international level," he said.

For Jean-Charles Rochat, professor of the University of Zurich's banking institute and the Toulouse School of Economics, an international solution is unlikely as "it implies a partial abandonning of sovereignty."

"We are contented with reinforcing prudential regulations to preserve the failure of a unique establishment. But nothing has been done to prevent the failure of the system," he complained.

The Basel Committee could also come up with a list of systemic banks, but such a list could "create the risks of distortion of competition," said de Longevialle.

"If we over-regulate the banking system, the banks would develop ... elsewhere," warned Rochat.

They could well create subsidiaries where they could transfer risky business in order to get around the rules, he warned.

Under the international Basel III reforms, banks of all sizes would be required to hold more reserves by January 1, 2015, with the "minimum requirement for common equity, the highest form of loss absorbing capital, raised to 4.5 percent of overall assets from 2.0 percent at the moment.

In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5 percent to "withstand future periods of stress," bringing the total of such core reserves required to 7.0 percent.

© 2010 AFP

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