Gold-plating will stay common, academic argues
A study of 'over-compliance' with international regulations such as the Basel capital rules finds several advantages for banks and regulators
Banks around the world should prepare for their local regulators to impose harsher rules than specified in the Basel III capital adequacy standard – known as 'gold-plating', super-equivalence or over-compliance – according to a speaker at the London School of Economics systemic risk conference last week.
Andrew Walter, professor of international relations at the University of Melbourne, pointed out that countries did not always seek competitive advantage by implementing the minimum possible capital and regulatory standards – a 'race to the bottom' approach, expected to be politically inevitable.
"Given the growing political power of the financial sector, it would be able to block regulatory responses to the crisis. You would expect under-compliance but you don't see it," Walter said.
Instead, over-compliance is common and sustained, in particular in lower-income countries, he said.
"In Mongolia, the regulators are saying 'we don't trust our banks to recognise non-performing loans, and we don't trust our own bureaucrats to detect them, so we need that extra buffer'," Walter said.
Poor countries might also be willing to minimise the chance of a costly bank bailout – which they could have difficulty funding – even at the expense of reduced competitiveness for their banks.
And not just poor countries – Walter pointed out that the "Swiss finish" super-equivalence on capital requirements could represent the desire to avoid a costly bailout of one of Switzerland's two too-big-to-fail systemically important banks.
The US, meanwhile, has imposed gold-plated leverage ratio requirements only on the largest banks. Walter commented that the approach "has the characteristics of a divide and rule strategy and it appears to have mobilised small banks to support these aspects of over-compliance", undermining the banking industry's ability to lobby against them as a united front, and splitting off the populist elements of the Republican opposition.
In some areas, too, he said, banks themselves might favour over-compliance: wealth management in particular could benefit from a perception of high capital levels leading to safety and soundness, and large banks could also benefit relatively if they found gold-plated regulations easier to comply with than their smaller rivals.
While many cases of over-compliance might not be as extreme in practice as they appeared, Walters concluded, they were nevertheless real and enduring – which raised questions about how easy regulatory convergence would be in the years ahead.
Banks around the world should prepare for their local regulators to impose harsher rules than specified in the Basel III capital adequacy standard – known as 'gold-plating', super-equivalence or over-compliance – according to a speaker at the London School of Economics systemic risk conference last week.
Andrew Walter, professor of international relations at the University of Melbourne, pointed out that countries did not always seek competitive advantage by implementing the minimum possible capital and regulatory standards – a 'race to the bottom' approach, expected to be politically inevitable.
"Given the growing political power of the financial sector, it would be able to block regulatory responses to the crisis. You would expect under-compliance but you don't see it," Walter said.
Instead, over-compliance is common and sustained, in particular in lower-income countries, he said.
"In Mongolia, the regulators are saying 'we don't trust our banks to recognise non-performing loans, and we don't trust our own bureaucrats to detect them, so we need that extra buffer'," Walter said.
Poor countries might also be willing to minimise the chance of a costly bank bailout – which they could have difficulty funding – even at the expense of reduced competitiveness for their banks.
And not just poor countries – Walter pointed out that the "Swiss finish" super-equivalence on capital requirements could represent the desire to avoid a costly bailout of one of Switzerland's two too-big-to-fail systemically important banks.
The US, meanwhile, has imposed gold-plated leverage ratio requirements only on the largest banks. Walter commented that the approach "has the characteristics of a divide and rule strategy and it appears to have mobilised small banks to support these aspects of over-compliance", undermining the banking industry's ability to lobby against them as a united front, and splitting off the populist elements of the Republican opposition.
In some areas, too, he said, banks themselves might favour over-compliance: wealth management in particular could benefit from a perception of high capital levels leading to safety and soundness, and large banks could also benefit relatively if they found gold-plated regulations easier to comply with than their smaller rivals.
While many cases of over-compliance might not be as extreme in practice as they appeared, Walters concluded, they were nevertheless real and enduring – which raised questions about how easy regulatory convergence would be in the years ahead.
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