Big banks complain to White House about FDIC interference in Basel II

They were complaining

to the Senate back in October:

"Recent proposals by the regulators, while well-intentioned, have the

potential to reduce the availability of affordable credit [and] adversely

affect competition among banks," said Jim Garnett, a top risk-management

official at Citigroup, at a Senate hearing.

Evidently that didn’t get anywhere, ‘cos they’ve now been reducd to complaining

to the White House:

Citigroup Inc., J.P. Morgan Chase & Co., and two other large U.S. banks

brought concerns about pending international capital standards known as Basel

II to White House officials as crucial deadlines for the standards approach.

The Jan. 4 meeting represents the most recent — and perhaps highest level

— attempt by the group of banks, which include Wachovia Corp. and Washington

Mutual Inc., to bring substantive changes to the Basel II capital proposal

before next year. The Federal Reserve and other bank regulators are still

discussing how to implement the standards by next January.

As if the White House is the optimal place to start getting into ridiculously

complicated and hard-to-follow debates about something (Basel II) which pretty

much nobody understands in full.

Martin Hutchinson

reckons that the US regulators are right, and that the US banks are wrong:

By allowing banks to employ use their own models, Basel II encourages the

move towards more arcane, unmanageable transactions, and relatively penalises

conventional old-fashioned banks whose risks are well understood. All financial

institutions should be constrained by a risk management system that is simple,

comprehensible and rigid. The largest Wall Street banks, such as Citi and

JP Morgan, need tighter controls than Basel II provides.

I’m not convinced: either that Basel II is insufficient, or that the extra

capital controls that US regulators want are a good way of redressing any shortcomings

that do exist. But I do stick by what I said

back in November:

If the FDIC had a problem with Basel II, it should have said so at some point

in the 1990s or at latest a few years ago, when things could still be changed.

Now, it’s too late.

Why on earth did the FDIC wait until now to spring this on the US banks which

are set to implement Basel II? I can absolutely see why Citi and JP are upset.

It’s all a function of the ridiculous amount of regulatory overlap in the US:

You can get the Federal Reserve on board, but that doesn’t mean you’ve got the

FDIC. Too many regulators have a habit of spoiling the broth.

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5 Responses to Big banks complain to White House about FDIC interference in Basel II

  1. Charles Kinbote says:

    If by “FDIC interference” you are referring to their insistence on continuing to maintain the liquidity ratio (essentially a ratio of a bank’s capital to its un-risk weighted assets), this is not a new position on the FDIC’s part, but something that has been recognized by the industry as a problem for years. One might actually be encouraged if this is the biggest stumbling block remaining, because it would mean that a lot of other thorny issues have been resolved.

  2. Charles Kinbote says:

    Also, given that two of the three main regulators (OCC and FDIC) are part of the Treasury Department, the White House, particularly the current White House, may not be a bad place for banks to plead their case.

  3. Andy says:

    Actually, the FDIC is an independent agency. The OTS is part of Treasury, as well as the OCC. WaMu, which is regulated by OTS, will probably have to conform to Basel II, so they have a stake in the game, but I haven’t seen WaMu’s name anywhere in this lobbying effort.

  4. Charles Kinbote says:

    Sorry, yes of course the FDIC isn’t part of Treasury, but I suspect it is more susceptible to influence from the White House than from Congress.

    With regard to WaMu, please note that they are cited in the recent WSJ piece above, along with Citi, JP Morgan and Wachovia – Bank of America seems to be the odd man out in these efforts. Based on my experience, OTS is usually represnted at meetings between regulators and the industry when WaMu has participated.

  5. Andy says:

    I see that I should have read the piece before commenting! I wonder how Paulson feels about Basel II — given his GS background, he is probably as well equipped to think about it as anyone in the administration.

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