FDIC’s McKernan suggests implementing Basel endgame in stages

FDIC board member Jonathan McKernan said today that he is open to a phased-in approach to U.S. adoption of the Basel III endgame proposal that “punts on the underdeveloped aspects” but implements its less-contested directives. McKernan and FDIC Vice Chairman Travis Hill in July voted against an interagency proposal to implement the Basel III endgame by raising capital requirements for banks with more than $100 billion in assets. During a speech in New York, McKernan reiterated his concern that the Basel committee made decisions with little or no explanation for how it reached its conclusions, but added that he was willing to consider moving ahead with implementation if regulators delay adoption of its more controversial reforms while more data is collected.

“Delaying implementation of the underdeveloped aspects would allow time for a trial run of the rest of the framework,” McKernan said, adding that such an approach also would provide an opportunity to “gather data and conduct analysis” to “recalibrate or improve” some of the “underdeveloped” pieces of the proposal. “That also could permit us to disclose through subsequent rulemakings the rationale and evidence for our eventual U.S. implementation,” he said.

McKernan said he supports efforts to enhance the regulatory capital framework, “but I am unable to support rote adoption of the Basel reforms without some validation of the underlying rationale for key design decisions. And I oppose efforts to reverse engineer higher capital requirements without regard to the costs and benefits or the underlying calibration framework. That does, however, seem to leave open an approach that moves to finalize the less-contested aspects of the endgame market risk reforms and then finalizes the rest through future notice-and-comment rulemakings that can rationalize our own U.S. implementations.”