Thomas Hoenig: Basel III "overly complex and opaque"

The newest members of the FDIC board question whether the Basel III capital requirements will be effective.

Regular readers know that Basel III will not end the current financial crisis, prevent a future financial crisis or provide market participants with any useful, relevant information on the risk being taken by the banks.

According to a Reuters' article,

The newest members of the U.S. Federal Deposit Insurance Corp raised concerns on Tuesday that forthcoming international bank capital standards, known as Basel III, might not be tough enough. 

At an FDIC meeting, board members Thomas Hoenig and Jeremiah Norton questioned the complexity of the new rules and whether the minimum requirements go far enough. 

"I remain concerned that as proposed, the minimum capital ratios will not significantly enhance financial stability," said Thomas Hoenig, who joined the FDIC board in April after retiring as president of the Federal Reserve Bank of Kansas City. 

"The rules continue to focus on risk-based capital ratios, which strike me as overly complex and opaque," Hoenig said.

By design, the rules are supposed to be overly complex and opaque.  

The Basel III capital agreement is the cornerstone of efforts by international regulators following the 2007-2009 financial crisis to make sure the global banking system is more resilient....

Given  that transparency is the cornerstone of resiliency and stability for the financial system, it is really an amazing comment that regulators are focused on overly complex and opaque capital requirements.

Norton said his worries included the robustness of proposed methods for determining the risk of an asset and, consequently, the corresponding capital requirement. 

"I remain concerned that the risk weightings for certain assets and exposures do not reflect sufficiently the inherent risk of default," he said. 

Particularly since the banks get to model the assets as part of determining how much capital to hold.

Needless to say, the whole discussion of Basel III is much ado about nothing as bank capital and capital ratios have been meaningless since the beginning of the financial crisis.