Basel's proposed endpoint criticized harshly by FDIC's McKernan, with particular focus on long-term debt concerns.
In a recent event held by law firm Mayer Brown in New York City, Federal Deposit Insurance Corp. (FDIC) board member Jonathan McKernan expressed concerns about the Basel Committee on Banking Supervision's endgame standards proposal.
McKernan advocated for strong capital requirements and an effective resolution framework as the best hope for eventually ending the practice of privatizing gains while socializing losses. He believes that bank failures, even large ones, are an inevitable result of a dynamic and innovative economy.
However, McKernan voiced his concerns about the rationale behind many Basel reforms, finding them difficult to justify. He encouraged commenters to share views on how to fix potential gaps in the proposal and develop a U.S. implementation that may deviate from the Basel standards in some respects.
One of the key points of contention is the proposal's requirement for regional banks and certain foreign banking organizations to issue long-term debt from both the top-tier U.S. parent company and the bank subsidiary, while U.S. G-SIBs must issue long-term debt only from the parent company. McKernan expressed concern about this requirement, fearing it could lock in regional banks' existing structures or incentivize consolidating more activities into bank subsidiaries.
Another issue McKernan raised is the Basel Committee's approach to operational-risk capital, which could lead to overcapitalization of banks with high-fee revenue. However, the committee has omitted a proposed solution from the final standards without explanation.
McKernan also questioned the process used by the Basel Committee to determine the quantitative thresholds for the traffic light system in the Basel standards. There is limited information available regarding how these threshold levels were determined, making it difficult to understand the basis for the proposal.
The quantitative thresholds defining the Basel Committee's traffic light approach to market risk capital requirements significantly impact those requirements. McKernan suggested that the FDIC should focus on ensuring the orderly resolution of troubled banks rather than solely trying to prevent bank failures.
Furthermore, McKernan voted against the July proposal, arguing that it could not provide nonbanks with a competitive advantage by shifting deposits away from the highly regulated, insured banking system. He called for regulators to carefully consider and justify their proposals in public.
The FDIC has proposed implementing the Basel endgame standards, but McKernan's criticism highlights the need for a thorough examination of the proposal's implications and justification. As the debate continues, it is clear that McKernan's concerns will play a significant role in shaping the future of banking regulation.
