Capital discipline - remarks by Andy Haldane

On a visit to Denver earlier this year, Andrew Haldane - Executive Director for Financial Stability - discussed the success, or otherwise, of international capital standards in forestalling banking distress and set out one possible framework that might address some of the observed short-comings.
Published on 23 March 2011

Andrew Haldane begins by defining three principles required, in his view, for regulatory capital standards to best insure the financial system against crisis: simplicity; robustness; and timeliness. Taking simplicity first, he says that under Basel I calculating regulatory capital ratios ".involved little more than half a dozen calculations.", but the quest to introduce greater risk-sensitivity in Basel II increased the required number of calculations to many millions. On robustness he notes that banks' attempts to model risk suffer from many sources of uncertainty such that ".error-based confidence intervals around reported capital ratios might run to several percentage points." He says: "For a bank, that is the difference between life and death." And turning to timeliness, he presents evidence that reported capital ratios as currently calculated ".are essentially uninformative about future bank stress". In summary, Andrew Haldane says: "A critic might argue that regulatory capital ratios have become too complex to verify, too error-prone to be reliably robust and too leaden-footed to enable prompt corrective action".

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