New Fed bank rules will solve nothing

Financial Review

PUBLISHED: 23 Jun 2012

Anna Bernasek 

Come into the time machine. I’ll set the dial for September 2008. The world – the financial world at any rate – has just ended. Credit markets have stopped working. Every major US financial institution is essentially bankrupt. Fear and panic prevail.

Let’s turn the dial forward to 2009. The world didn’t end; not even the financial world ended, since it received infinite backing from the US Treasury. But still, nobody’s happy. The economy is in the tank. So is the stockmarket. There’s no lending to speak of. Reform of the global financial system is the talk of the day.

Another twist of the dial and we’re in November 2010. The G20 has just made a bold promise: in two years, sweeping changes to strengthen global bank capital requirements will be adopted by major countries.

Step out of the time machine with me, back to June 2012. The US Federal Reserve just unveiled its plan to meet the G20 timetable. The new bank regulations are here!

Fed chairman Ben Bernanke hailed it as a model for the rest of the world. “I think this may well be the standard against which other capital regimes around the world may be measured going forward, and I hope that other countries, other jurisdictions, will meet this standard,” he bragged.

But after two weeks, banks and lawyers are still trying to figure out what those standards really mean.

Maybe that’s because the Fed’s proposal is 800 pages long. A once-through read took one bank’s team of experts three days. Bankers, lawyers, and lobbying groups continue to diligently comb through every page. So far they only agree on one thing: the complexity is awe-inspiring. Which should give one pause.

Every serious review of systemic failures leading up to the collapse cited excessive complexity as a major cause. Some view complexity as the whole problem. A month – even a day! – before Lehman Brothers collapsed, there was no way for investors or the public to assess if it was fully solvent or worthless. There were lots of rules and disclosures, but none was worth a damn.

Four years later, the vaunted fix for what was condemned as overly complex and therefore unsafe is more complexity. If the devil lurks in the details, in 800 pages he’s surely got plenty of places to hide.
“The irony is when this is done there will be less uniformity than before because of all the complexity”, says someone close to the process.

The level of complexity makes a mockery of public disclosure. The banks will say their capital is “x per cent”. But how in heaven’s name can anybody get a commonsense picture of what’s really going on? Only the bank (at least one hopes so) and perhaps the Fed have a prayer of gaining insight into bank risk.

So will these new rules change anything? They certainly include lots of new categories and definitions as the Fed plays catch-up to financial “innovators”. But if the new rules don’t curtail innovation, how long do you think it will take to devise something risky to shoehorn into an unforeseen (maybe intentional) linguistic gap?

Bankers and experts are trying to understand the differences globally. “The whole notion of whether we will have a level playing field is very high on people’s minds,” says Tom McGuire, head of Barclays Capital capital advisory group in New York.

After a historic financial crisis, US regulators have missed the mark.