A Conversation with FDIC Chairman Sheila Bair

Mind Over Market ^ | August 4, 2009 | Robert Stowe England

[WashingtonSource]

Question: Do you think leverage requirements should be part of any financial regulatory reform in the United States, regardless of what happens to Basel II capital requirements?

Sheila Bair: Although the intense public debate over Basel II seems like a thing of the distant past, I remain committed to the idea that leverage requirements are important for banks not just in the United States but around the world. By providing capital even when risk-based measures (erroneously, as it turned out) indicate minimal risk, the leverage ratio is a critical part of our overall approach to capital regulation. When we emerge from this crisis, a top priority must be crafting a sound capital framework that helps avoid a repeat of past problems; it should include a leverage ratio.

The Basel Committee is in the process of changing capital rules in a number of areas. There will be improvements. But for most banks, these improvements are unlikely to offset what we see as a capital-lowering bias that is essentially baked into the advanced approach. With the dangers of excessive leverage so clearly demonstrated over the last 18 months, it would be imprudent to determine regulatory capital based solely on the advanced approach.

I strongly believe that global leverage capital requirements are sorely needed. They should apply to all systemically important financial firms, regardless of charter. Unlike the current system, they would set a capital floor for the advanced approach, which would limit excessive leverage in the future.

[WashingtonSource]

Finally, a regulator who unequivocally sees the need to reduce leverage at banks and other financial institutions and who sees the flaws "baked into" the current approach around the globe. I applaud her call for a capital floor to offset the bias of the so-called advanced approach(read that as risk-adjusted, super- complicated to hide the facts)