The Basel III global banking standards are overly prescriptive and complex but by and large NZ still has to comply, RBNZ's Spencer says

By Gareth Vaughan

The Basel III international banking regulatory standards are too prescriptive and overly complex, says Reserve Bank of New Zealand Deputy Governor Grant Spencer.

In a speech this week Spencer pointed out the 1987 Basel I international capital standard was 30 pages long, the subsequent Basel II standard was 347 pages, and the post global financial crisis Basel III standard 616 pages in length.

Asked by interest.co.nz whether this drastic increase in the volume of global banking regulations concerned him, Spencer said it did.

"Yes it does because I don't really believe that the degree of complexity that we see in Basel III internationally is really necessary," said Spencer.

"The approach that Basel has taken is quite a prescriptive approach, which is like setting rules that everyone has to go by rather than setting principles and then telling individual country regulators 'go and set up your own rules that comply with these principles'," said Spencer.

"They've said 'here's one set of rules that everyone has to follow.' Because it's impossible for everyone to follow one set of rules, they have to have all sorts of variations to cover the difference between, say European banks and American banks and Japanese banks. And so to me that's a big source of the complexity."

In his speech Spencer noted New Zealand isn't a member of global rule setting bodies the Basel Committee on Banking Supervision, the Financial Stability Board (FSB) or the Group of 20. That means New Zealand isn't obliged to follow the Basel rule book.

"However, we agree with the underlying rationale of the international reforms. New Zealand banks did not suffer a serious credit shock in the GFC, but we saw how quickly bank capital could be eroded in global financial institutions. And our banks experienced real difficulties in funding and liquidity management that required official support. We have therefore acknowledged the need to increase the safety of the financial system by enhancing the prudential regulatory regime," Spencer said.

Australia, where the parents of New Zealand's big four banks are domiciled, is a member of the G20 and Basel Committee. And New Zealand is a debtor country that has relied on the major banks to fund its current account deficits over many years, Spencer added, meaning the banks' access to international capital markets could be hindered if they were seen to be non-compliant with the key Basel and FSB standards.

"In short, as a small debtor country hosting foreign banks and reliant on international capital markets, we cannot afford to be too far removed from the Basel tent. I note that the current Australian Financial System Inquiry has recently reaffirmed this same position for Australia," said Spencer.

"Over the past five years we have reviewed the emerging Basel III reforms and shaped our financial regulations to suit New Zealand circumstances. This has been something of a balancing act. We have not adopted all the Basel reforms. For example, we have not adopted the leverage ratio. And we have introduced some policies that differ from the Basel standards, for example the Reserve Bank’s liquidity standard, BS13, in order to better reflect New Zealand conditions."

"In doing this, our general approach to prudential standards has been relatively conservative, and we have tended to be early rather than late adopters of the new standards," Spencer said in his speech.

The following chart was taken from the notes to Spencer's speech 'Taking stock of financial sector regulation'.

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