14 September 2007

Turmoil requires hard look at Basel capital charge, says Canada’s Dodge

Global banking regulators will have to look very hard in the light of the current financial market turmoil at what the capital charge should be in respect of loans sold on by banks, says Canada’s central bank chief.

However, Bank of Canada governor David Dodge says he’s not sure that there is much value to be added by governments or regulators ‘coming in and telling people what to do.’ In an interview published today in the UK’s Financial Times newspaper, Dodge is sceptical of moves by the European Central Bank to try to normalise lending in the money markets by issuing billions of euros in thee-month money. Dodge earlier this week attended the bi-monthly central bank governors’ meeting in Basel, Switzerland held under the aegis of the Bank for International Settlements, the so-called central bankers’ central bank.

Dodge says regulators with the Basel Committee on Banking Supervision, the body of top banking supervisors from the leading economies that in effect regulates international banking, ‘will have to look very hard at what the capital charges should be (for loans sold on by banks)….We may just not have it quite right’.

However, Dodge’s main message in the interview is that highly structured financial products should be made more transparent so that buyers ‘can clearly see what they are buying’. Structured securities are created by slicing, dicing and repackaging existing pools of loans, including those made to borrowers with poor credit records in the US market for sub-prime mortgages whose problems have spilled over into financial markets elsewhere in the world.

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