 "Martin Hellwig")
Martin Hellwig, a co-author of a book on wrong notions about the banking sector, has suggested increasing equity requirement for banks to 20%-30% of total assets against 3%, prescribed by the Basel III to avoid recurrence of financial meltdown.
Delivering the Bharat Ram Memorial Lecture here on Wednesday, Hellwig said,"Our proposal is to go for 20%-30% of total assets, with no risk weighting."
The academician, who is Director in Germany-based Max Planck Institute of Research on Collective Goods, also wanted that netting of relative gross assets versus liabilities in derivatives be not allowed, while implementing his suggestion.
"They should not attempt to have sophisticated systems of calibration of these capital requirements to account for purported difference in assets," he said. Together with Anat Admati, Hellwig has authored a book, titled-- The Bankers' New Clothes What's Wrong With Banking And What to Do About It. The topic of the lecture was also the same.
Taking a dig at Basel III norms, Hellwig said after the crisis they decided to have equity requirement at 3% of total assets.
And last weekend, he said Basel III decided they would allow netting of assets and liabilities in derivatives.
"This means this 3% can be quite meaningless in practice... Basel III has not provided for much change," he said.
When asked whether this stricter norms should also be applicable to Indian banks which have more or less avoided financial meltdown, Hellwig replied in the affirmative, saying banks in the country are also now inter-connected with rest of the world.
To a query whether Basel committee would agree to his views, Hellwig said ," I am an academic."
Hellwig explained how did he come to the figure of 20%-30% capital requirement. According to him, the figure is based on capital requirements in pre-World War one era. After the war broke out and the economies are in depression, the requirements have been slashed. This did not lead to any meltdown immediately, but the situation has changed now because of excessive leveraging and toxic assets, he added.
Explaining the situation at the time of global financial crisis, he said many banks had equity equal to 2%-3% of total assets, but they used risk weighting to reduce thse requirements. He cited UBS and Lehman Brothers in this connection.
