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Global regulator may simplify complex new bank rules

By Laura Noonan

LONDON (Reuters) - The world's main bank regulator may simplify a mass of new rules coming in for the industry, a sign that watchdogs are still grappling with how best to keep banks in check nearly five years on from the financial crisis.

The regulator - the Basel Committee on Banking Supervision, - on Monday published suggestions on how to simplify its new regulations after an internal review of whether the rules, designed to safeguard the world's financial system, had become too complex.

Several policymakers, including the Bank of England's head of financial stability Andrew Haldane, had criticized them as such. Banks have also complained that the rapidly-expanding body of regulation is taking up too many resources.

The new rules aim, in part, to get banks to hold more capital to support lending and other activities and to cushion against losses. But implementing such a system across different banks and countries has created a complicated web of regulations.

In its review, the Basel Committee, made up of regulators from major financial centers, identified several areas where the complexity of regulations had produced negative effects, such as making it harder for banks to plan their capital needs and leading to less accurate assessments of risk.

"The fact that they're even thinking of simplifying it shows that they are at least aware of that (that it's an issue), which is good," said Patrick Fell, head of PricewaterhouseCoopers UK regulatory capital practice.

"Whether they will achieve that is a good question. It's a brave regulator that takes regulations away."

Basel Committee chairman Stefan Ingves said the regulators were "keenly aware" of the debate on whether the rules were too complex but had not yet decided whether they should be changed.

"The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework," he said.

But the regulator still believes that a risk-based system, which inevitably involves some level of complexity, should remain at the heart of financial regulation since it takes account of risk more precisely than a more broad-brush approach.

COMPLEX ISSUE

In Germany, the industry association for public sector banks and development banks welcomed the Basel Committee's willingness to tackle the complexity issue.

"The high degree of complexity of the new banking regulatory rules has long been a thorn in the side, particularly the lack of coordination between separate individual rules," a spokesman for Germany's VOEB banking association, said.

Germany's co-operative banking association BVR said that the financial complexity that triggered the financial markets could not be countered by complex financial regulation.

In Spain, a spokesman for BBVA said the bank would welcome any proposal to "help pave the way for a more homogenous treatment of capital."

The Basel Committee task force charged with examining complexity in global bank rules, set out a range of "potential ideas" to improve them in a 27-page document.

These included compelling banks to standardize disclosure of information and limiting the discretion of national supervisors, since this makes it harder for investors and other interested parties to compare banks across countries.

National discretion is particularly significant for how banks calculate the risks on their books via so-called risk weights. A Basel Committee study released on July 5 showed vast differences in the way the rules were applied in different countries.

These different treatments of risk assessment or risk-weighted assets have a big impact on banks' capital ratios - the benchmark number for their financial health.

The comparability of banks' risk weighted assets has also been blighted by the fact that some banks use 'internal' models for calculating the riskiness of loans on their books rather than using standardized models.

The Basel committee task force suggested "re-examining" the use of these internal models and to make greater use of floors and benchmarks that would make it harder for banks to deviate from industry norms.

It also suggested enhancements to a leverage ratio, which is a simpler way of limiting banks' capital requirements by restricting their assets to a given proportion of their capital.

A leverage ratio measures a bank's capital against its total lending and is considered to be less easy to circumvent than risk-weighted capital ratios.

(Reporting By Laura Noonan. Additional reporting by Sarah White in Madrid, Kathrin Jones, Arno Schuetze and Jonathan Gould in Frankfurt, Laurent Lionel and Christian Plumb in Paris, Stephen Jewkes in Milan.; Editing by Sinead Cruise and Jane Merriman)

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