The Great Debate UK
from Felix Salmon:
Is Ireland’s problem a Basel problem?
Does the Ireland crisis bespeak a major weakness in the Basel capital-adequacy regime? Simon Nixon thinks so: the fact that investors won't lend to Bank of Ireland, he says, "highlights a major weakness of the Basel capital rules that European banks operate under."
This is an interesting idea: Ireland's problem is a banking problem, banking problems are Basel problems, and therefore it stands to reason that Ireland's problem might be a Basel problem. But if you look more closely at Nixon's reasoning, his thesis ends up falling apart.
Nixon lays the blame at the feet of Basel's well-known weakness: the fact that it concentrates on risk-weighted assets rather than total assets. And he implies that there might be large national differences when it comes to the ratio of risk-weighted assets to total assets, while conceding that thesis " is impossible to prove from regulatory disclosures."
But there are three huge things missing from Nixon's piece. First, he takes just one bank from each of four different countries (Santander in Spain, BNP Paribas in France, Barclays in the UK, and Deutsche Bank in Germany) to illustrate national differences. He would be much more interesting, and much more compelling, if he presented a couple more datapoints in each country, to help give readers a better idea of whether French banks in general tend to have a higher ratio of risk-weighted assets to total assets than German banks in general, or whether we're just looking at idiosyncratic differences between BNP Paribas and Deutsche Bank.
from Felix Salmon:
Varley’s flexible views on Basel
In the UK, it seems, the revolving door from big private banks into a grandee's public-sector role doesn't turn quite as smoothly as it does in the U.S. And so sometimes it needs a not-so-gentle shove:
John Varley, Barclays’ chief executive, has broken ranks with the rest of the global banking industry, arguing that the availability of credit should be unaffected by tough new capital rules for banks, which he regards as fair.
from Felix Salmon:
Grading Basel III
If you haven't seen it yet, it's worth taking a look at Alan Blinder's WSJ op-ed on Basel III. We'll get to his conclusions in a minute, but whatever you think of those, he's done us a great service in clearly laying out the big problems with Basel II that the Basel III needed to address: Capital requirements were too low; There was too much reliance on credit ratings; Banks could use internal models to measure risk; Banks could get around the rules by setting up off-balance-sheet entities like SIVs; It lacked any kind of liquidity requirements.
Most of the emphasis and commentary about Basel III has, properly, concentrated on the first of these. Blinder doesn't like the delayed implementation of the new levels, but that doesn't bother me so much: as I've said before, these ratios are in place already, on a de facto basis.
from Breakingviews:
U.S. has much to prove on new bank capital rules
American banks and regulators have a poor track record when it comes to adopting global capital standards. The United States was a major driver behind the Basel II accord, signed in 2004, but then barely implemented the rules on an extremely late schedule. That is why many Europeans are right to be wondering whether the tough new framework known as Basel III, agreed by global regulators earlier this month, will again be deemed optional on the other side of the Atlantic.
Senior U.S. officials are making the right noises. Treasury Secretary Timothy Geithner told Congress on Wednesday the United States is "committed to meeting" the end-2012 implementation timeframe. FDIC Chairman Sheila Bair is even more optimistic. She told Reuters this week the American delegation had wanted a quicker transition and reckons plenty of U.S. banks will do it faster on their own anyway.
from Felix Salmon:
The biggest weakness of Basel III
I'm unapologetically happy and optimistic about the outcome of the Basel III process, and I haven't been impressed by most of its critics -- until now. In two posts, the first at the Economist and the second at The American Scene, Noah Millman does an excellent job of explaining the biggest weakness with Basel III. Which also happens to be the biggest weakness with Basel II.
The problem is that while Basel II was a bold experiment which took a decade to put together and which even then never really got implemented, Basel III was much more of a rush job, and therefore could not be a soup-to-nuts reimagining of what a global macroprudential regulatory regime should look like. Even if that were a good idea.
from Breakingviews:
Another Lehman will come — and should fail too
The blind self-belief of financiers can't be abolished. Neither can cycles in the industry. But two years after the disastrous failure of Lehman Brothers, regulatory shifts have the potential to reduce the impact of a repeat. The challenge for politicians and watchdogs is not to go soft.
That's what happened before. A munificent Federal Reserve helped stoke a leverage bubble that masqueraded as "the Great Moderation." Meanwhile, financial regulators of all stripes dozed off, encouraged by lawmakers too cozy with Big Finance.
from Felix Salmon:
Basel III arrives
Basel III has arrived! The official BIS press release is here, with a wealth of information inside it. But they conveniently also supply this table, which gets to the core of the matter:
There's a lot to unpack and explain here. But the first thing to note is that we've moved from a simple "Tier 1 has to be 4%, Tier 2 has to be 8%" to a 3x3 matrix with all manner of different minima. It's a bit more complicated, but it's also more intelligent, and should be much more effective as well.
from Felix Salmon:
Why Basel III won’t hurt banks or the economy
The new Basel III capital ratios are going to be announced this weekend, and the banks are going to complain about how much the new ratios are going to raise lending costs and hurt economic growth. The BIS, of course, has taken these complaints seriously, and has released two monster reports calculating exactly what the impact of higher capital standards will be.
The first report looks at the long-term effects of higher capital standards. They look something like this:
from Felix Salmon:
Basel III: The compromise
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.
from Felix Salmon:
Will Basel III really deliver?
I very much hope that Die Zeit is right about the Basel III capital requirements: the numbers being mooted there are definitely at the top end of what anybody expected.
They start with a bare minimum Tier 1 capital requirement of 6%; that's a substantial increase of 50% over the 4% minimum that holds right now. And then they get tougher. There's also a 3% conservation buffer: essentially, if your Tier 1 capital is less than 9%, you're constrained in what you can do; certainly you can't pay out dividends to shareholders. On top of that, the countercyclical capital buffer is being set at another 3%, which means that in good times, healthy banks wanting to pay dividends will need Tier 1 capital of 12%.
