Comments on: Why the Basel change was a bad idea A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: GeorgeLekatis Thu, 10 Jan 2013 23:30:59 +0000 1. The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

2. During periods of stress it would be entirely appropriate for banks to use their stock of high quality liquid assets (HQLA), thereby falling below the minimum.

3. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

4. European and American banking stocks surged because they will incur much reduced costs due to the implementation of the relaxed rules.

5. Banks in many other counties will have no benefit, as supervisors have already asked for strict liquidity rules, and they are not willing to take it back.

6. On the negative side, the main objective of Basel iii is to restore investor confidence. The Basel Committee has developed the new framework as a response to the crisis, and has explained (time and time again, every month since November 2010) the need for these strict rules.

Although it is true that Basel iii is an overreaction to the market crisis, it is way too late now to “ease” the rules and make investors happy the same time. This is simply a red flag for investors, leading to the conclusion that banks could not really comply.

I agree with the Liquidity Coverage Ratio (LCR) Basel iii amendment, but I cannot agree with the way it was presented.

George Lekatis
Basel iii Compliance Professionals Association (BiiiCPA)

By: brg Wed, 09 Jan 2013 20:05:31 +0000 Liquidity is money. And anything the central bank accepts becomes money. Defining mortgage-backed securities as liquidity implies that the central bank will convert it to cash when needed.

By: Strych09 Wed, 09 Jan 2013 19:43:56 +0000 The not-quite-so-obvious answer to what Greycap asked, rhetorically, “Bagehot argued that Britain’s monetary arrangements were the source of much of her prosperity. In particular, that the provision of liquidity was the role of the central bank. What has happened in the 21st century to vitiate this argument?”

Globalization. Multinational corporations.

No taxpayer in Walter Bagehot’s Britain was called upon to provide cover to bets gone bad made by a citizen of another country working for a multi-national non-bank institution like U.S. taxpayers had to pony up billions of U.S. dollars to cover the bad bets made by Joseph Cassano and his band of malefactors at A.I.G. Financial Products.

Furthermore, what The U.S. Federal Reserve and The U.S. Treasury did during the so-called financial crisis to backstop foreign banks and non-bank companies could hardly be called just providing liquidity.

Wall Street banksters and their apologists want to call what happened “providing liquidity” so as to cover up the wholesale robbery of U.S. taxpayers.

By: realist50 Wed, 09 Jan 2013 17:19:16 +0000 I concur with both y2kurtus and Greycap. Banks obviously need some liquidity, but the true protections against bank runs on solvent institutions are deposit insurance and access to central bank lending.

As for requiring banks to keep large amounts of cash and cash-like instruments on hand – “A ship in port is safe, but that is not the purpose of a ship.” A basic purpose of banks is maturity transformation – turning short-term deposit liabilities into longer-term interest-earning assets (traditionally loans).

By: Greycap Wed, 09 Jan 2013 13:11:12 +0000 The broadening of what counts as a “liquid” asset seems pretty mild, considering that 1) steep haircuts are applied to the new asset types and 2) in aggregate, the new asset types can comprise no more that 15% of liquid assets – after haircuts. The reduction in outflow rates looks far more significant to me.

Having said that, what is your answer to y2kurtus? Back in the 19th century, Bagehot argued – correctly, in my view – that Britain’s monetary arrangements were the source of much of her prosperity. In particular, that the provision of liquidity was the role of the central bank. What has happened in the 21st century to vitiate this argument? It looks reasonable to expect central banks to provide liquidity against this small fraction of questionable assets at the mandated haircuts.

By: y2kurtus Wed, 09 Jan 2013 11:30:15 +0000 Capital requirements are 10x more important than liquidity requirements. During times of crisis central banks and the government can provide liquidity with a few keystrokes using traditional support measures that are ready to deploy on a moments notice.

It’s an order of magnitude harder and risker for governments to try and solve the solvency issue.

Fear not for weak liquidity controls.

Fear greatly for weak capital requirements… for they insure the TBTF’s will be back hat in hand some day threatening the end of the world.

By: FifthDecade Wed, 09 Jan 2013 09:16:53 +0000 An interesting take on the lack of liquidity that stimulates thought on the same lack in the economy generally. While there is a lack of sufficient lending to smaller businesses who want to grow, I believe the growing problem is the rapidly accumulating cash piles in large corporations, particularly the low tax paying multi-Nationals. As they dominate more and more of each of their respective markets, they suck out cash from the wider economy and act as a dampener on growth.

As far as banks go, the successive Basel Accords have increased the need for banks to be more solvent, and they have used more of their profits than they needed to do in the past to build up reserves. This *has* taken money away from economic growth, although it could be argued more damaging to the economy generally are politicians so desperate for power for *their* party they so disparage their opponents running of the economy that it scares people out of spending money. In a consumerist society, that is a bad thing.

Your closing remark about the effect of the recent changes making banks riskier over the long term implies that is a bad thing – but is it really? Which is more important, the circulation of money within an economy, or its accumulation as treasure to be set against rare events that happen once every lifetime?