Felix Salmon

Basel III: The compromise

By Felix Salmon
September 9, 2010

Maybe 9% was too good to be true after all. According to David Walker, of Australia’s Banking Day, a compromise with “nations including Germany, France, Italy and Japan” has knocked 0.5% off the proposed Tier 1 capital requirements, and another 0.5% off the proposed conservation buffer. As a result, banks wanting to pay dividends are now going to have to have a minimum of 8% Tier 1 capital, rather than 9%.

If* the new ratios are strictly enforced once they become fully phased in, this is still a big improvement over what we had before, and a win for the community of global bank regulators. Still, we’re not there yet: final agreement won’t come until the G20 meets in Seoul in November. Fingers crossed nothing else will get diluted between now and then.

*This of course is a big if, and Kindred Winecoff, for one, thinks that it’s hopeless to even dream that it might become reality:

Politicians won’t give up their domestic authority or ability to address changing local circumstances, so agreements made in Basel are subject to interpretation, implementation, and enforcement by domestic regulators. The U.S. still hasn’t come into full compliance with Basel II, for example, and there is essentially no recourse for other nations or the BIS to force it to do so.

There’s certainly a coordination problem here: countries have every incentive to drag their feet and watch the rest of the world tighten up, leaving their own banks at a global competitive advantage. But having clear rules and a coordination problem is a vast improvement over having no clear rules at all. And if the G20 can agree to do this in November, I have some hope that they can also commit to hold each others’ feet to the fire going forwards, if one of them starts backsliding.

One comment so far | RSS Comments RSS

I find the meetings in Davos very important, as they close some of the gaps of the G20 decisions.

Example: In November 2010, the Financial Stability Board (FSB) and the G20 endorsed the Basel III Accord. The Basel Committee has developed the framework.

And what they have discussed in Davos?

I read in the summary prepared by William Dowell:

“While the Basel III Accord dealt with efforts to create international norms for financial regulation, the fact is that each country adds its own regulatory framework to the mix.

The result is an overly complex financial environment that works against efforts to stimulate the economy and promote future growth.

The trend to overemphasize regulation to prevent future crises also overlooks the fact that the crisis in 2007-2008 was an exceptional event.

An analogy can be made to aircraft seat belts. It makes sense to have the best safety belts possible just as it makes sense to make rational rules for banking but, in the case of passenger airplanes, it makes even more sense to invest in an effective air traffic control system that prevents a crash from happening in the first place.

In the case of the financial system, establishing a consistent international structure is likely to be even more crucial than focusing on individual banks.

The difficulty in harmonizing the international system is that each country needs to deal with its own domestic political reality, and that inevitably takes precedence over international agreements.”

George Lekatis

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