GREGORIO BORGIA
Here was the scene late Saturday afternoon in a large auditorium in Washington.
Bank of Canada Governor Mark Carney and his old Oxford University pal Philipp Hildebrand, the head of the Swiss National Bank, were on a brightly lit stage with the heads of four banks that are too big to fail: Peter Sands, chief executive of Standard Chartered; Alfredo Saenz Abad, CEO of Banco Santander; Brian Moynihan, chief executive of Bank of America; and Marcus Wallenberg, chairman of the board of SEB. Looking down on them is a standing-room-only crowd. Most are bankers attending the annual meeting of the Institute of International Finance.
Maybe your correspondent has watched too many episodes of "Spartacus: Blood and Sand," but it was difficult to interpret the next 90 minutes as just another panel discussion on financial regulation. The stage took on the look of the floor of an arena; the participants, rhetorical gladiators in a match that was rigged in favour of the hosts. Not that it mattered that the regulators were outnumbered by the regulated. The Oxford lads had their way with the bankers.
"I always felt you underestimated the commitment to financial regulatory reform," Mr. Hildebrand said in a remark directed at the IIF's boss, Charles Dallara. "There's still a lot of fragility in the system," Mr. Hildebrand said. "You might need some of this loss absorbing capacity that we've given you in a year or two."
At issue, of course, were the new Basel III banking standards that will force banks to maintain significantly larger capital buffers. The bankers' arguments against Basel III came off as a bit limp. The Basel Committee of bank supervisors gave national authorities until 2019 to implement all of their proposals, yet there were Mr. Wallenberg and Mr. Moynihan, still worried that the tighter standards might hurt economic growth.
To this, Mr. Carney said "the timetable was longer than anyone thought it should be" and "it's there to be used, and will be used, however the macro-environment demands it." Mr. Carney also made the point that the Basel standards had to be rigorous enough to earn the confidence of newly powerful emerging market countries, which were sideswiped during the financial crisis by problems that were largely created by Wall Street and the City of London. "This process had to be credible," Mr. Carney said. He also said emerging-market banks will have no problem meeting the Basel III standards because most already exceed them.
One thing left undone by Basel III is what to do with those "too big to fail" banks. The Basel Committee said such banks -- authorities prefer "systemically important financial institutions," or SIFIs -- should be subjected to even tougher standards. But it's still unclear how many banks would be designated SIFIs, and what these tougher standards would be. The Basel Committee has suggested several measures, including higher capital buffers, surcharges, and "contingent capital," or debt that converts to equity at times of stress.
The Banco Santander chief thought that banks that implement sound management practices should get a pass on paying surcharges. Not likely, Mr. Carney and Mr. Hildebrand implied in their remarks. Mr. Carney said every bank in the Group of 20 nations should expect, at a minimum, that laws will be passed that will allow governments to "resolve" any SIFI that is under stress. Mr. Hildebrand dismissed worries that no one will buy contingent capital, saying there already are markets for similar products. Based on the performance of Mr. Carney and Mr. Hildebrand, global authorities appear determined to erase "too big to fail" from the lexicon by making it clear that governments and central banks won't be bailing out big banks in the future.
"The end point is to take that quasi-guarantee away," Mr. Carney said.