Bank rules under fire after SocGen scandal

Central bankers meeting in Davos said they would review risk rules after the financial crisis blew holes in balance sheets and threatened to tip the global financial system.

Regulators praised the Basel II rules – which went online in Europe on January 1 – for raising banks’ risk sensitivity, but the US sub-prime mortgage crisis has made it urgent to patch weak spots in the accord.

“It’s a good time now to review Basel II,” Brazil’s Central Bank Chief Henrique de Campos Meirelles said after meeting regulators and central bank governors at the World Economic Forum, which has been overshadowed by the market crisis.

Brazil is the chair of the G20 combined group of wealthy and big developing countries this year. Meirelles said the powerful group will focus on restoring financial stability badly damaged by the sub-prime crisis. His calls echo recent comments by European Central Bank President Jean-Claude Trichet, who also sought a review of specific revisions in the accord, completed after six years of contentious negotiations in 2004.

They also underscore support among regulators to restructure swathes of the regulatory landscape and homogenise standards in a globalised system, where sparks in one country can set fire in another. That happened when failed US sub-prime mortgages brought parts of Germany’s banking system to its knees.

Speaking in private, regulators said they are too busy managing the crisis to map out exactly what the long-term changes to the regulatory landscape will be.

“We won’t know what to do until the dust has settled,” said a source with inside knowledge of the Basel Committee on Banking Supervision and the Financial Stability Forum of regulators and central bankers.

At that point, banks will face an overhaul to slash business lines, simplify investments and remove incentives that led US companies to underwrite the bad debt that led to the crisis. (Reuters)

The laundry list of changes

Regulators rejected the idea of a global supervisory authority, but are considering a veritable laundry list of change, including:

-        The role of ratings agencies and the assignment of risk-weighted capital under Basel II

-        Encouraging homogenised products

-        Tougher rules on asset securitisation

-        Liquidity regulations

-        Standardising the characteristics of over-the-counter derivatives and moving trade to electronic platforms