NEW YORK (
CEO Vikram Pandit attacked the Basel banking reforms in a speech given on Monday, arguing that the new set of banking regulations are not just flawed, but outright miss the mark more often than not, and may just cause the next financial bubble.
The speech, made by Citi CEO Pandit at the annual Buttonwood Conference at the City University of New York on Monday, was a wide-ranging review of the banking sector regulatory overhauls made during the past year, including not just the international Basel reforms but also the Dodd-Frank U.S. legislative reform package and the consumer protection CARD Act.
Pandit had some bones to pick with the U.S.-specific bank reforms, saying that the Dodd-Frank legislation and CARD Act may have the unintended consequence of clamping down on loan availability for the lower income brackets, if not leading to an outright abandonment of low-income and rural communities where banks can't make enough money.
In any event, the big banking reform target of abuse for Pandit in his speech was Basel, over which he described his concerns as "deep." The arguments made by the Citi CEO in his speech are sure to be featured as part of bank industry lobbying efforts to reshape Basel requirements.
"The Basel Committee reforms are headed in the right direction. But in some respects they don't go far enough and in others they miss the mark," Pandit said.
The Citi CEO took aim at three of the four major provisions of Basel: 1) resetting capital requirements; 2) creating a level playing field across financial institutions; and 3) creating geographic parity in addition to parity among financial institutions.
Pandit had little to say about excessive leverage, but an excess of complains about the rest of Basel. It "addresses the over-leverage problem. But on the other three, it is either silent, doesn't go far enough, or makes the problem worse," Pandit said.
Pandit described Basel as helping to create a bidding war over capital requirements "in which some regulators internationally are now attempting to outdo Basel -- and one another. In this war, whichever country imposes the highest additional capital requirements 'wins.' Let's be clear: double-digit ratios will have direct negative impacts on lending, capital formation, aggregate demand and growth. And with proper regulatory supervision, they aren't necessary to make the system any safer," Pandit argued.
The Citi CEO also argued that Basel will encourage banks to begin over-leveraging again -- in full compliance with the rules -- piling risk into the system. By raising capital requirements for bad times and further lowering them for good times, Basel will encourage banks to over-lend once a recovery is fully underway. Alternately, when credit is most needed to spur a recovery, Basel would serve as a handicap by limited business access to credit.
Pandit sharply criticized the use of FICO scores for small business owners and consumers who most need access to loans. Remarking on a provision to use credit scores from the worst years of the financial crisis as a way to assess the risk profile of a borrower, Pandit said, "That's like calculating the future personnel needs of the Army based on end strength from 1942-1945.... The past, literally, will count for more than the future."
In this way, Basel will misdirect capital, and it will increase the cost of borrowing for consumers and small businesses. "The 'haves' who need credit the least will get the most -- and pay the least for it. The 'have-nots' who need credit the most will be hurt the most," Pandit said.
On the creation of a level playing field across financial institutions, the Citi CEO doesn't think Basel is up to the task, and is merely laying the foundation for "the development of another shadow banking system."
The Citi CEO argues that the banking system is not synonymous with the financial system, and by raising capital requirements for banks to a level beyond that which the market would dictate, another unregulated financial niche will pick up the risk slack and could lead to another bubble. "It probably won't be mortgage brokers who fuel the next bubble. But some unregulated financial niche will arise, posing similar -- or greater -- dangers...Overall risk in the system could actually rise," Pandit argued in his speech.
In fact, the Citi CEO said the Basel reforms "create new incentives to rebuild some of the worst features of the very environment that led to the crisis."
Finally, Pandit says there is nothing in Basel to ensure a geographically level playing field. Europe, Asia, Latin America and the U.S. all interpret and implement the three iterations of Basel differently -- in some cases on a regional and in others on a country-by-country basis. "Nothing in Basel III will change that -- nor do the non-binding rules even attempt to do so," the Citi CEO argued.
-- Written by Eric Rosenbaum from New York.
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