Carney: Foreign regulator exams of U.S. banks under Basel rules “troubling”

180px-National_Bank_OamaruHugh Carney, the senior counsel for the American Bankers Association, recently said that Basel capital rules have “been the birth place of many bad ideas.”

“The inclusion of unrealized gains and losses into capital and the deduction of mortgage-servicing assets are prime examples of how the Basel Committee [on Banking Supervision] has jumped the rails of reason,” Carney said, American Banker reports.

Carney said that Basel’s peer review program could change the way the U.S. deals with international regulators. Historically, the Basel Committee has avoided an enforcement role. The committee decided recently, however, to establish a framework that will be used to monitor members’ implementation of Basel standards.

“The monitoring framework’s first step was to issue a very general report on Basel implementation in member nations,” Carney said, according to American Banker. “The next steps are far more intrusive.”

A June report from the committee to the G-20 indicated that the new program could include “on-site” visits by foreign regulators to U.S. banks.

“In the past, I’ve taken comfort that U.S. regulators were generally reasonable and approachable,” Carney said, American Banker reports. “I believed they were a force that tempered the zeal of Basel academics and translated international regulatory theory into the realities on the ground in the U.S. I had faith that U.S. regulators would impose regulations that fit the diverse U.S. banking sector and our economy. This would all seem absent in the Basel peer review program.”

Regulators in the U.S. and abroad have differed in their interpretations of the rules. Carney said that “enforced convergence is a double-edged sword that raises worrisome issues for our country.”

“I find it extremely troubling that foreign regulators will be in U.S. banks on U.S. soil to ensure they are complying with foreign standards, just because U.S. regulators felt it was OK,” Carney said, according to American Banker. “Technically, banks can opt out of foreign examiners entering their banks. However, when U.S. regulators have endorsed the program and even chair the Basel group running the program, few banks will view participation as voluntary.”

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