FEDERALIST SOCIETY FINANCIAL SERVICES PRACTICE GROUP[dagger]: PANEL DISCUSSION: "THE IDEAL BASEL", THE

Fordham Journal of Corporate & Financial Law, 2008 by Fisher, Keith R

I'm also glad that we're having a discussion of Basel. I think someone earlier this morning pointed out that this is a very important issue that is probably one of the most significantly ignored subjects here in town-in fact, not only just here in town. I was at a banker's convention last year, and I was still fairly new enough to the banking trade associations that I could ride on the bus to the airport fairly anonymously. I heard a couple of bankers chatting, and said, "What'd you think of the conference?" "Oh, I thought it was great; I'm glad they didn't talk about Basel again."

Now, just earlier this year I was asked-at the beginning of the year reporters will ask, "What do you see as the big issues this year?" I unhesitatingly will tell them, "The most significant issue for bankers this year is Basel capital rules." I can think of nothing more important to a banker than the rules that govern his capital. That's the foundation of his business. It's fascinating to me how significant an issue it is, yet how little it is often paid attention to.

I work for a trade association that represents the whole industry. We have banks that are $15 million in assets, as members. We have banks that are measured in the trillions of dollars in assets, and we have everything in between. And so, a real challenge for us has been how to deal with the whole Basel issue. What I wanted to talk about today is how we, as an industry, have been coming to grips with this whole capital exercise.

I begin by the recognition that the old Basel rules, as Karen, I think, presented here very powerfully, don't work. They're broken. Maybe they worked for a while. I think the key principle of Basel I was the recognition that maybe we ought to have some kind of similarity in capital standards across the nation, across the world, for financial institutions that compete with one another so that investors might have some way of comparing one another on some standards. Now that was the concept; it wasn't realized in reality, but that was the idea of what got Basel I going.

Since then, we've had-developing some of the problems-a mismatch of capital and risk.115 These are serious fundamental mismatches that have very significant financial inefficiencies of how we allocate capital, how we use our finances, as well as some very serious structural problems that develop over time.116 We have, frankly, the concept of having this unified international system increasingly falling farther and farther short in practice, so that people recognize we really don't have an international set of standards at this point. A good example of that was, frankly, what happened to the Japanese banks117 under Basel I and how very different their experience was from banks in the United States under Basel I that also went under significant financial stress.118 We got through that stress very quickly. The Japanese decided, let's perpetuate it for a decade and see how that works.119 The results, of course, were very telling.