Should we worry about the Basel delay?

September 13, 2010
Basel III rules.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google,mail" data-share-count="false">

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?


Comments are closed.