Should we worry about the Basel delay?

By Felix Salmon
September 13, 2010
Basel III rules.

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Two of the smartest people I’ve met are coming out this morning with an unexpected (to me, at least) criticism of the Basel III rules.

Mohamed El-Erian:

“The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts.”

Joe Stiglitz:

“While it’s understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk. Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”

I haven’t been particularly worried about the timetable up until now, mainly because I haven’t seen much evidence that any systemically-important banks are going to take advantage of the long phase-in period to get away with having capital levels lower than the eventual minimum.

Of course, systemically-important banks are going to have an extra too-big-to-fail capital requirement slapped onto them, over and above the minimum requirements laid out yesterday. So it’s just as well that all of them are currently in compliance with the vision that the BIS technocrats have for smaller banks around the world. (Deutsche Bank might not be there today, but it will be once it’s done raising $12 billion in new capital.)

But the big bonuses that Stiglitz is worried about are overwhelmingly paid out by banks which would be compliant with these new Basel III rules even if they were implemented tomorrow. And once a bank is compliant, the market will punish it severely if it slides back during the phase-in period.

It seems to me that when it comes to the big players in the interbank markets, and any bank with a decent-sized capital markets division, the Basel III standards are de facto in place right now; the only exceptions are banks which have already been nationalized. Or am I missing something here?


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Felix, Thanks for covering Basel III in depth. Personally, I feel we need more analysis on which banks currently comply with the new rules and which ones don’t. I’m skeptical that the eight year Basel III phase-in period is benign.

Posted by Polycapitalist | Report as abusive

I think there’s a key problem here. Even though people including you, Felix, and a number of other specialist financial scribes have done a superb job in reporting on and analysing the Basel III rules, such reforms are ignored by the mainstream media.

This enables the technocrats and governments who put these things together to do so in a vacuum, in ways that may be more likely to suit the bankers than the wider public interest. Robert Peston, ex-Financial Times journalist and business editor of the BBC, wrote a blog piece on this today robertpeston/2010/09/why_have_we_left_ba nk_reform_t.html. I agree with him.

In an information vacuum, it is easier for bankers and their lobbyists to use scaremongering tactics in the hope of getting reforms killed off or delayed, as I reported in qfinance in June:  /2010/06/23/bankers-square-up-to-regula tors-over-economic-fallout-of-basel-iii.

Posted by IanFraser | Report as abusive

Tougher rules is good thing but I am sure there will have smarter ways to bypass these rules.

How about fixing the problem with currency (Pegging it to bullion) so that currency becomes strong enough where bank can not do bad loan. Today there is paper currency so bank can do it. And they know if they fail, they will get bailed out..With hard currency banks can’t play much.

With this news though I revisit, do not necessarily change my predictions on …URL below. predictions.html

Amaresh Gangal

Posted by Amaresh_Gangal | Report as abusive

I’d recommend against a fix to bullion. Let’s be clear about this, gold has some actual value as a metal but only a tiny fraction of the current “value” of gold. The value of gold is 100% created by the greater fools phenomenon. Some day some one is going to say “you’ve got to be kidding, that stuff’s worthless” and the next day everyone stuck with the stuff will have to pay to have it carted away. Best to sweep it quickly away before anything important is broken when this happens.

Posted by bigturkey | Report as abusive

The basel framework is simply a HUGE step forward when compared with the status quo. The added flexibility will allow national regulartors to implement countercyclical policies.

The best part is that because of the 2.5% cushion CEO’s won’t be able to be even near the mnimums because to do so would make it impossible to raise new equity or preffered equity.

The one “problem” is that goverments are sort of expecting banks to use the phase in period to slowly build up capital through earnings retention. That will absolutely NOT HAPPEN. Banks were shrinking their balance sheets before these requirements were released… they will do so with increased urgency now.

You will see a race to get capital ratios up above maximum ranges… some banks are already there.

The easiest way to increase your capital ratio is run a report on your loan portfolio and then simply not renew your least profitable customers.

I’m sorry Wal-mart… we won’t be re-upping your $100,000,000 line of credit anymore because we aren’t interested in lending a penny at LIBOR -50bps. Ya, I know you’re a big account… it’s just that your business is marginally profitable and by dropping the 10% of customers who are the least profitable we increase our capital ratios by a full percentage point like the goverment wants.

That is absolutely playing out right now. Borrowers who were use to rate shopping are getting the cold sholder. Depositors who are threaten to pull their deposits because of paultry rates are being told “I’m very sorry to lose your business Mrs. Smith”… (but that is EXACTLY what I want because I don’t need your deposits because I’m not trying to grow my loan book.)

Over all I’m thrilled with the Basel framework.

Posted by y2kurtus | Report as abusive