BIS seeks worldwide reset of banking rules

The head of the bank for International Settlements, Jaime Caruana, yesterday argued for international coordination on banking regulation, noting that "macroeconomic and financial stability at the national level does not necessarily add up to global financial stability".

Caruana presented the paper at a symposium to mark the 50th anniversary of the RBA in Sydney yesterday, with the paper published at the RBA website.

In a paper that sums up many of the regulatory debates arising from the global financial crisis, Caruana stressed the need for banking systems to increase their levels of holdings of capital and liquid assets.

Both are regulatory trends that, to some extent, banks in Australia are aiming to modify on the ground that the strife revealed worldwide over the last three years was not so evident here.

Speaking with a worldwide audience in mind, Caruana noted that "capital requirements should draw on deep pockets that can absorb losses arising from financial and economic stress, thus reducing the risk of spillover from the financial sector to the real economy.

"Lessons have been drawn on the need to improve the quality of capital, to raise the level of capital and to improve the [Basel Committee's regulatory] framework's capture of risk, especially as regards the trading book.

"And agreement has been reached that both belt and braces are needed, so that one's trousers are held up by a simple leverage ratio even if the risk-weighed ratio is distorted by an inadequate risk assessment of the assets."

Caruana did not deal in his talk with the gripes of banks over the effective increase in their cost of funds, or limits on the availability of credit implicit in the shift in approach by bank regulators. Rather he adopted a macro view.

"One of the most fundamental improvements introduced by the Basel Committee in its reform package is the macroprudential focus to address both system-wide risks ad the procyclical amplification over time.

"We have learned that those deep pockets I mentioned need to be made even deeper in good times so that more can be taken from them in bad times."

Caruana will be speaking publicly at lunch today at a function for the Melbourne Centre for Financial Studies.