BoE's Andrew Haldane: changes coming to "too complex" bank capital rules

Reuters reports that the Bank of England's Andrew Haldane has told British MPs that changes are coming to both "too complex" bank capital regulations and bank accounting rules.

In both cases, the changes are aimed at getting the regulation and rules to better reflect reality.

Regular readers know that even though these are steps in the right direction, at the end of the day we are still talking about the combination of complex rules and regulatory oversight being substituted for the combination of transparency and market discipline.

The number one lesson from the financial crisis is that the combination of complex rules and regulatory oversight doesn't work and the continued pursuit of this combination will result in another financial crisis.

Requiring banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details would be far more effective in preventing future financial crises than the modest improvements Mr. Haldane is suggesting might occur in bank capital regulations and accounting rules.

Bank capital rules coming into force this month are too complex and efforts to simplify them are already underway, a senior Bank of England official said on Monday. 

Andrew Haldane, the bank's director of financial stability, was among the first senior regulator to question Basel III, the world's core regulatory response to the 2007-09 crisis, that led to banks being bailed out by taxpayers. 

Basel III, agreed by world leaders, forces lenders to hold more capital, but Haldane says it is too complex and relies on banks using their own models to determine capital buffers. 

He told British MPs there was an increasing awareness among international regulators they may have taken a "false turn in the road" by backing Basel III which was written by the Basel Committee. 

"Regulators cannot really police this complex beast," Haldane said. "There are moves afoot with the Basel Committee to seek ways to simplify and streamline the move to a proper regulatory rather than self-regulatory edifice. That may take some time."....

Regulators can't police even the simplest bank capital rules.  It frankly isn't in their job description.

The question that financial regulators ask is 'does the bank have enough capital to absorb the potential losses from the exposures on and off its balance sheet?'  The answer is either the bank has enough capital to absorb the potential losses or it does not regardless of what its capital ratio might be.

That global financial regulators have a tough time answering the capital adequacy question has been shown many times over the last few years when banks that passed the regulators' stressed tests subsequently needed another bailout or to be nationalized.

The Basel Committee said earlier this month work on reviewing in-house models would be accelerated this year. 

"There is a big straw in the wind ... The big trend here is the retreat is from in-house models," said Simon Gleeson, a financial lawyer at Clifford Chance....

But Haldane said Britain won't wait for Basel's work to finish and the Financial Services Authority watchdog was already forcing banks to use simpler models for totting up risks from commercial property on their books. 

"There is no reason why they could not do that across a wider set of portfolios," Haldane said. 

There was also nothing to prevent UK regulators from imposing "floors" below which capital levels could not fall irrespective of what internal models show, Haldane added.

All of this is simply rearranging the deck chairs on the RMS Titanic.

He is member of the bank's Financial Policy Committee (FPC), which sets the tone and direction for regulation in Britain. From April, the bank becomes the regulator for lenders.

There was also support on the FPC for a higher leverage ratio or balance-sheet cap on banks than the 3 percent set under Basel III, he said....

Accounting rules used in the EU, drawn up by the International Accounting Standards Board, were also "not as prudent as they could and should be for financial firms," he said, arguing the rules failed to ensure banks make early provisions on souring loans and also lead to under-recognition of losses. 

Reforms to accounting rules put forward by the IASB and its U.S. counterpart were still "unfinished business" and therefore Britain was asking banks directly to make bigger provisions than they need to under accounting rules. 

"We are working privately with FSA and auditing firms to see if we can't at least provide better disclosure about fair value gains and losses than is the case right now," Haldane said. 

The UK authorities are thrashing out a "prudent valuation framework" to put a price tag on illiquid or toxic assets, and force banks to make deductions from their capital buffers.

Excuse me, but it is the role of the markets and not the financial regulators to value financial securities.

Since the beginning of the financial crisis it has been abundantly clear that the market cannot value opaque securities like the 'black box' banks or the 'brown paper bag' structured finance securities.

Common sense suggests that the regulators' time would be better spent bringing transparency to all the opaque corners of the financial system rather than creating unenforceable regulations.

"We might in time be able to inject a notion of prudent valuation into accounting," he added.

Actually, if banks were required to provide ultra transparency it would be unnecessary to inject the notion of prudent valuation into accounting.

Market participants would simply adjust each banks' accounting numbers for the difference between the actual value of the bank's assets and the reported value.