Citigroup’s Pandit Says Basel Accords Could Make Credit Crunches Worse

Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse.

While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said.

“By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S.

Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout. The so-called “Basel III” accords are designed to keep the banking system from “falling into crisis again,” Pandit said.

New regulatory goals announced in September by the panel, made up of regulators from 27 nations, has triggered a “bidding war” for setting the highest capital targets in different countries that will hurt economies, Pandit said.

Factbox – Reaction to Basel III bank capital rules

(Reuters, Mon, Sep 13 2010) – Banks will have to more than triple to 7 percent the amount of top quality capital they hold to withstand future shocks, global regulators and central bankers ruled on Sunday.

The agreement, known as "Basel III," will force banks to set aside far more capital to withstand market shocks in future in a bid to lessen the need for bailouts by governments seen during the financial crisis.

Following are some reactions and official statements issued after the agreement:

Factbox – Changes to Basel III bank capital plans (Dated Jul, 2010)

(Reuters) – Central banks agreed a draft of changes on Monday to ease the pain of the planned Basel III reform that will make banks hold more capital and liquidity to withstand shocks without taxpayer aid. The modifications were agreed by the Group of Governors and Heads of Supervision, a body of central bankers and regulators from the Group of 20 and other leading countries.

It oversees the Basel Committee on Banking Supervision, which drafted Basel III last December, sparking warnings from banks that they would not be able to keep up lending to the economy while significantly beefing up capital.

No key elements of Basel III are being scrapped as regulators insist on keeping the package intact in return for the longer phase in agreed last month by the G20. Many of the changes, such as on deferred taxes and treatment of minorities, will be welcomed by countries such as Japan, France and Germany.

The G20 is set to endorse a finalized Basel III reform in November with implementation from the end of 2012.

(For full list of modifications, double-click on: here)

BASEL III Overview and Update (http://www.basel-ii-risk.com)

Firstly, some BASEL II History (BASEL III Overview is below)

• Basel II was implemented by many European and Worldwide banks in 2006.
• The existing guidelines were found to be unsuitable to ensure adequate bank liquidity during the Credit Crunch conditions. Basel II rules are now being reviewed in conjunction with the industry.
• There are a number of criticisms of Basel II, including that the rules are influenced by the industry, and they are very dependent on rating agencies.
• There were a number of weaknesses exacerbated by the credit crunch including:

Basel III details released (http://www.bis.org)

Basel III: the main points

The new rules, known as Basel III, will require banks to hold top-quality capital totaling 7% of their risk-bearing assets

Julia Kollewe and Graeme Wearden
guardian.co.uk, Monday 13 September 2010 10.15 BST

Basel III: banks will have to carry more capital under the new rules.

Banks will have to raise hundreds of billions of euros in fresh capital under new regulations designed to prevent the repeat of another financial crisis.

The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7% of their risk-bearing assets, a big increase from 2%, but banks are being given more time than expected to comply with the rules – in some cases until 2019.