Washington DC and London, May 18, 2010 — "Reforming the global regulatory framework is absolutely vital. We are now at a critical juncture and it is in our collective interests that we get the principles right and start to move forward in practice," said Stephen K. Green, Chairman of the Steering Committee on Regulatory Capital (SCRC) of the Institute of International Finance (IIF) and Group Chairman of HSBC Holdings plc.

Speaking on behalf of the IIF, which is the leading global association of financial institutions, with over 390 member firms, Mr. Green noted that detailed responses have been made by the industry to reform proposals by the Basel Committee on Banking Supervision. He stressed that, "No one disputes that capital and liquidity need to be strengthened, but the macro economic effect must be carefully calibrated."

IIF Managing Director Charles Dallara stated that the Institute is finalizing a set of cumulative economic impact studies, for publication on June 10, 2010 at the IIF's Spring Membership Meeting in Vienna, Austria. He said, "The studies taking account of the Basel proposals as published for comment in December, look at the impact of increased costs of capital and funding on credit and economic growth in different areas of the world. Our initial findings are sobering and suggest that without adjustment the proposals could have serious consequences for global economic recovery. In addition to getting the design and calibration of the new measures right, it is essential that policy makers weigh carefully the timing of their implementation, given their potentially major economic impact. Furthermore, the economic effects will be all the greater if, in addition to the core Basel proposals, we see a host of special taxes and other requirements imposed on major global financial institutions by diverse national and regional public authorities.

Mr. Green added, "The direction of reform is clear and correct and, as an industry, we look forward to continuing this constructive dialogue with regulatory authorities to deliver a stable, effective and sustainable system for the future."

The IIF's submission to the Basel Committee, which has been endorsed by the IIF's Board of Directors, has been developed by the Steering Committee on Regulatory Capital (see attached membership list) and its working groups. The IIF report to the Basel Committee raises many serious issues, of which the following are particularly critical:

Cumulative Impact Assessment and Timing: the design and calibration of the proposals needs to be based on assessment of their cumulative impact, with full consideration of the interdependencies among the proposed measures. Decisions on the timing of implementation need to be based on a careful assessment of economic conditions and the resilience of the global financial industry. Implementation should involve the careful phasing-in of specific requirements, with grandfathering where necessary.

Capital Composition: improving the composition of banks' capital is necessary. However, the proposed rigid definition of capital will have a significant impact on firms' lending. The currently proposed regime of exclusions and deductions would benefit from reconception to achieve a more economically realistic result, while nevertheless ensuring that the overall quality of capital improves throughout the system.

Leverage: The Institute supports preventing excessive growth of leverage in the system, but the currently proposed gross leverage ratio (disregarding all risk mitigation) would result in an overstated and misleading view of firms' economic risks, leading to disproportionate constraints on lending. It would substantially disadvantage lower-risk banks and banking systems, creating perverse incentives. These disadvantages would be compounded if, as proposed, the leverage ratio is established as a fixed, mandatory tool. It is crucial that the leverage ratio be applied as a "Pillar 2" concept in order to avoid fundamental contradictions with the adjusted framework of the new Basel system. On that basis, a carefully designed leverage ratio could be used by supervisors as a supplementary metric among several tools in order to detect anomalies and to prevent excessive leverage at individual firms. Current divergence of accounting standards creates a need for substantial regulatory adjustments in any leverage ratio: convergence of accounting standards is by far preferable for reduction of complexity and to achieve a level playing field, but much remains for the standard-setters to do before that is achieved.

Counter-cyclical Measures: a combination of risk management, forward-looking provisioning and capital tools is needed to address procyclicality. But layering buffers and requirements as is proposed threatens significant overshooting, as such buffers will likely add on rigid additional capital, unlikely in fact to be available for use in case of economic stress. In particular, rigid triggers of buffer requirements are likely to be counterproductive to a weakening firm's recovery. Actual availability of capital buffers during times of stress needs to be ensured, which is not the case under current proposals.

New Liquidity Framework: The Institute has long advocated strengthening liquidity management, in particular the need for robust short-term survival ratios. However, the current proposal fails to consider market effects, for example, in defining eligible assets. In addition, while long-term funding requires good risk management, the proposed long-term -˜Net Stable Funding Ratio' turns what should be a risk-based assessment of each bank's exposures and funding into a rigid formula based on arbitrary assumptions. A narrow definition of liquid assets focused on sovereign debt raises fundamental concerns about bank balance sheets, particularly at this time; it fails to recognize that not all markets have sufficient supply of government debt; it would distort markets for bank and corporate paper; and it fails to recognize improvements in the risk management and overall risk profiles of firms.