CBRC's Luo Ping fires Basel broadside

A director-general of the China Banking Regulatory Commission tells the Risk Asia conference in Hong Kong that the new Basel rules being introduced in the wake of the financial crisis are too complex.

Luo Ping, a director-general of the China Banking Regulatory Commission, fired a broadside at the Basel Committee on Banking Supervision on Monday by saying its new rules are too complex.

Speaking at the Risk Asia conference in Hong Kong, Luo said a more simplistic approach is needed and that China’s own interpretation of the Basel rules are already “generally consistent” with the committee’s minimum standards.

This, he said, is more important than imposing measures and standards on countries that were not yet applicable.

“I believe it is very important to be realistic. When the rules are too complex it is more likely the implementation will go faulty,” he said. “Basel or the capital framework can be scaled down to meet specific countries’ [requirements] without sacrificing its substance.”

Basel III is the global regulatory standard agreed by leading central bankers to toughen bank capital requirements and thereby reduce systemic risks in the wake of the 2008 global financial crisis. 

In particular, Luo said the rules being introduced through Basel III appear to focus more on future possibilities than the current state of affairs.

“Conceptionally speaking I am still troubled with the question to what extent should we write the rules and regulation to address future concerns rather than tackling issues and problems for the time being.”

And, in an unusual analogy, he likened the situation to another sensitive topic.

“If it is too far down the road, should you care about it? In Asia, in a conservative country like Thailand or Indonesia or Malaysia, do we think gay marriage is an issue? Probably not, probably not.”

Luo said the inclusion and treatment of certain types of financial instruments, such as derivatives and credit default swaps, were not necessary for China at present as they did not exist in the banking system.

He said that many banks, supervisors and bank managers felt confused and intimidated by new concepts that were not yet part of their vocabulary. 

“Our language is an ideogram; part of it suggests a sound and part suggests a meaning. [It] is difficult to make [these English concepts] part of our language in the first place. How do you expect [such] broad measures to align with yours.”

“Rich people can say ‘I park my SUV by the townhouse’. It’s part of their vocabulary but this means nothing for local people who have had little exposure overseas. “

And, Luo suggested, such complexity could give way to more bad habits, such as those that dragged the world into financial crisis and precipitated the revised Basel framework.

“The complexity inherent in various models potentially gives a large bank considerable opportunity for regulatory arbitrage and that makes a comparison extremely difficult. So there is a risk that the use of advance approaches may add complexity to regulation without ensuring effective supervision.”

Luo is not alone in warning of the dangers of an overly complex set of rules and, indeed, it was perhaps the main theme of the first day of the conference.

He finished by drawing on a speech last year by Andrew Haldane, executive director for financial stability of the Bank of England, who criticized Basel III by saying  “as you do not fight fire with fire, you do not fight complexity with complexity”.

Not to be outdone, William Coen, deputy secretary-general of the Basel Committee on Banking Supervision, responded to the question of complexity in a speech that followed Luo’s.

“Simplicity should not be an end in itself. If there is a complex regulation that results in risk-sensitivity at bank level and also produces comparable results from bank to bank, jurisdiction to jurisdiction, I think that is a good thing,” Coen said.

“[However] There are areas of national discretion that can impede comparability. There are probably 100 areas of national discretion. We have catalogued all those.  We are looking at Basel framework and where it is unduly complex.”

The debate continues. 

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