Systemic risk regulators should direct policy not just give warnings, says HSBC's Haswell

Past experience suggests the new financial stability bodies should direct regulatory policies, not just warn about instability

Systemic risk bodies should provide "direction" for micro-prudential regulators, including on the setting of counter-cyclical capital ratios in order to maintain financial stability, according to Charles Haswell, group strategy and planning at HSBC.

Setting counter-cyclical capital ratios is a matter better suited to national systemic risk bodies - such as the planned US systemic risk council of regulators or the Bank of England's (BoE) existing Financial Stability Committee - rather than by international groups, according to Charles Goodhart, professor at the London School of Economics (LSE) and a former policy-setter at the BoE.

Goodhart and Haswell were speaking at a seminar held on Basel III and banking regulation, hosted by the UK's National Institute of Economic and Social Research (NIESR) on May 18.

Goodhart said that because different countries were at different stages of financial cycles at different times, setting minimum ratios to avoid pro-cyclical capital was a task not suited to European Union-level bodies, citing the EU "single market" example of simultaneously stable property prices in Germany and unsustainable market bubbles in Ireland and Spain.

Haswell said the output of the planned European Union European Systemic Risk Council (ESRC) should not just be providing "warnings", as Jean-Claude Trichet, governor of the European Central Bank has suggested, but to set banking core capital ratios.

He also said the ESRC should specify markets showing "exuberance" so national supervisors would raise capital for firms judged to have particular exposure to a particular market or business models in need of diversification.

Haswell said this direction from the ESRC should be used "selectively" to provide a link between macro-prudential (systemic) and micro-prudential (bank-specific) regulation under the guise of the existing Pillar II process under Basel II and the Capital Requirements Directive (CRD).

Goodhart highlighted that central bankers had "never made use of Pillar II" before the financial crisis, and said directions to national banks should be "discretionary" from international bodies such as the ESRC, the Basel Committee on Banking Supervision and the G-20 Financial Stability Board.

He said central bankers were wary of "taking away the punchbowl" during periods of economic exuberance, citing the example of the Federal Reserve's lack of pre-emptive action against the US subprime crisis.

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