At least some of the complexity in bank capital requirements "could, and probably should, be reduced" in the interest of market discipline, Boston Fed President Eric Rosengren said in remarks at an event today in Abu Dhabi.
"When the regulatory environment becomes more difficult for investors to understand, the efficacy of market discipline can erode. Market discipline requires at very least that investors and the public can clearly understand the financial condition of firms. As a result, too much complexity may be costly," Rosengren said during a speech about bank capital regulation at the Program for Financial Sector Supervisors in Abu Dhabi.
"While some of this necessarily reflects the complicated nature of the business of global banking, I think it would be beneficial to look for ways to streamline discussions in order to focus investors and the public on those factors most relevant to the financial solvency of the firm," he said.
However, Rosengren also said the increased attention on high-quality capital at banks was important and called it a "lesson learned and applied" from the most recent financial crisis.
According to his prepared remarks, the Boston Fed president argued that the variety of banking models and their associated risks meant that both risk-based and leverage-based capital requirements were necessary.
"Consider the fact that the capital ratios of the largest banking organizations are comparable to those of the wider group of bank holding companies with more than $50 billion in assets when using risk-based capital – but are low relative to those banking organizations when using the leverage ratio," Rosengren said.
Since a number of the largest global banking organizations have significant broker-dealer operations and are highly dependent on wholesale funding, they are inherently more susceptible to runs and their relatively low leverage-ratio capital might not be appropriate, he said.
The event was organized by the Financial Stability Institute of the Bank for International Settlements.
