Basel spatwatch, EU vs US edition

By Felix Salmon
June 2, 2011
Peter Spiegel's story yesterday that Michel Barnier, the European commissioner in charge of financial markets, had sent a strongly-worded letter to Tim Geithner.

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It’s not an easy time to be a central banker. In both the eurozone and the US, unemployment is proving stubbornly immune to monetary policy. And on the regulatory side of things, the global nature of the banking system means that you need to get all major countries on the same page. Which is proving all but impossible, as the latest little spat between EU and US regulators proves.

The FT has all the details, starting with Peter Spiegel’s story yesterday that Michel Barnier, the European commissioner in charge of financial markets, had sent a strongly-worded letter to Tim Geithner, complaining that the US has historically been very slow on adopting Basel standards, and that its attempts to regulate bankers’ pay are toothless and ineffectual. All of this is true.

Today, the FT follows up with the US response, which concentrates on the fact that the US is ahead of Europe on matters such as central clearing and derivatives trading, and hinting that Europe is more likely to backslide on the Basel III timetable than America is. These, too, are reasonable points. Treasury also pushes back on the matter of banker pay, saying it has no real interest in prescribing how much people get paid, just how much risk they’re incentivized to take. That one makes less sense.

This ministerial-level Twitter fight doesn’t, ultimately, make anybody look good. One of the big successes of the Basel III process was that while there were serious disagreements along the way, the governments and central banks concerned were pretty good at keeping the discussions productive and confidential. But just as with Dodd-Frank, it seems, the real difficulty is going to be in implementation, and that’s where there’s a big risk of everything becoming very political.

In the short term, the biggest winners in any fight between regulatory authorities are always going to be the banks, who will happily arbitrage differing regional regulatory regimes and take advantage of their parents’ squabbles to stay out drinking all night. In the long term, however, even the banks would ultimately prefer a single global regulatory regime with clear ground rules and a level playing field — something which lets them concentrate on their main job, of banking, rather than expending enormous effort on lobbying and loopholes.

But with large fractures now emerging even within Europe, and with attention being focused on averting the meltdown of the entire euro project, the chances of a global regulatory consensus seem as far away as ever. Which means that although Basel III is a great idea in theory, the jury’s still out on whether it’s ever going to be consistently implemented in practice.


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“unemployment is proving stubbornly immune to monetary policy”

Maybe now people (especially central bankers) will understand that increasing the supply of money does not always lead to job growth. Just making more money available does not mean people will invest it. If you don’t have anything worth investing in, it doesn’t matter if the interest rate is zero, you’re still not going to risk it.

There is enough capital floating around the world to finance growth. What is needed is a reason for that capital to be deployed, instead of sitting under virtual mattresses earning near 0%. Companies have returned to profitability after adjusting their businesses for the post-2008 reality, and they are hoarding their profits. The tax system must be changed to penalize hoarding and reward re-investment. This is not the domain of central bankers, but rather (unfortunately) politicians.

Posted by KenG_CA | Report as abusive

I’m still getting calls for Basel II implementations. Basel III will be fully implemented in the US about the time Felix is of retirement age. Maybe.

Posted by klhoughton | Report as abusive