MNI INTERVIEW: Global Banks Over-Levered- Ex Basel Head Ingves

Bankers and politicians are allowing banks around the world to operate with capital at a fraction of safe levels, former Basel Committee on Banking Supervision chairman Stefan Ingves told MNI, saying that society had effectively chosen to favor short-term gains despite growing risks.

The former Riksbank chief, who oversaw the post-crisis Basel III reform process during his tenure at the head of the world’s banking supervision body from 2011 until 2019, said supervisors had “homework” after the collapse of Silicon Valley Bank highlighted how part of the U.S. financial system has been exempted from the new global standards.

Leverage ratios are recognized in technical circles as being only a fraction of real requirements, Ingves told MNI. Under Basel III, Tier 1 capital leverage ratios are set at a minimum 3% of total assets, though in practice they tend to be higher.

“If you look at more sort of academic papers and you think about this in terms of the leverage ratio, which I think is the most relevant measure, then we are talking about 10 to 30%, and it varies of course from country to country, and now we run banks at about 5,” Ingves said. “There is sort of a societal consensus that’s okay to run banks with too little capital.”

TACIT AGREEMENT

Political systems have effectively decided to accept periodic bank crashes, he suggested in an interview in which he described his work with the Toronto Centre, which trains regulators from around the world.

“And that’s not all that surprising because the lower the leverage ratio the more you can lend in the short run. And the shorter the political cycle, the greater the interest in running banks with low capital because the bankers and the politicians end up on the same side so to speak in the near future, despite of the fact it gets more dangerous in the long run.”

In the case of Silicon Valley Bank, which had heavy exposure to rising rates and a high proportion of uninsured deposits, supervisors need to learn their lessons, he said.

"There is not a consensus at the global level on how to define an internationally active bank. So for example in the case of Europe, Basel III covers all banks, while in the U.S. you had cutoff limits and Silicon Valley Bank, if I use that bank as an example, it fell below that limit, so there is some homework that needs to be done,” Ingves said.

In general, Ingves said, “Being a supervisor is about saying no, and people don’t like that.”

Since leaving Sweden's central bank last year, Ingves has chaired the Toronto Centre, which since its establishment in 1998 trained more than 20,000 officials from 190 countries and territories. Much of that work shifted to digital sessions since the Covid pandemic, which Ingves said raised larger questions of how regulators function when on-site visits are difficult.

Some issues haven't changed, such as lobbying by bankers against tougher rules around capital requirements or mortgage lending, he said. “Bankers’ associations all over the world have always argued that if you are going to be this evil in terms of the rules, then we won’t lend to SMEs.”

MORTGAGE RULES

Canada tops an IMF list of the world's riskiest housing markets, and recently banks were advised to consider extending amortizations for borrowers struggling with payments amid central bank rate hikes.

“The problem seems to go away in the short run, but if people actually do borrow more, one, risks go up, and two, prices will go up even more," Ingves said. While the decisions around this are often wider ones for a society, he also noted: “People get hurt when things blow up.”

With central banks under pressure to modify policy in line with climate goals, Ingves noted that this will be difficult for institutions primarily mandated to address inflation. Issues include what is likely to be a protracted task to draw up standards to avoid the problem of greenwashing.

“Central bankers and supervisors need to think hard about where do they show up in all of this, what kind of role are they supposed to play,” he said.

Ingves also sounded a note of caution on developing and emerging markets, which "run into trouble sooner or later," he said, adding he wasn't making specific predictions. (See MNI INTERVIEW: Ex-FDIC's Bair Sees Limited SVB Contagion Risk)