Where does Britain stand in the global economic race?
Following the international financial crisis of the late 2000s, the worldâ€™s financial leaders have been working towards a standardized banking system that will strengthen banks at an individual level, and thus improve the banking sectorâ€™s ability to survive stress when it occurs.
In 2010 the Basel Committee produced a third accord outlining a set of regulations, with the goal of solving the banking system’s ongoing problems. Since then the conversation has yet to cease over whether enough has been done, since the peak of the crisis in 2008, to ensure a stable financial environment that supports growth on an international scale.
The importance of Basel III lies not only on an inter-continental scale, but for individual countries to maintain the required standard regulations to a point of sustainability. In Europe, the debate over the role Britain will play in Basel III has yet to be resolved. During early Basel III discussions in May 2012, Michel Barnier, the French European commissioner for financial regulation, clashed with British Chancellor of the Exchequer George Osborne over the suggestion of higher leverage ratios in the UK, stating that a distortion of competition within the EU had the potential to cause a continental disadvantage.
In recent times the political context surrounding Basel III has not dwindled. In the Autumn Statement released on December 5 2013, Osborne revealed that “Britain is currently growing faster than any other major advanced economy.” As it stands Britainâ€™s rate of recovery, in comparison to that of other EU members and the U.S., puts the country at risk of greater pressure to conform to the standardized regulations proposed in the Basel III accord. For Britain there is a better hope of financial prosperity and continued development in strengthening relations with China. Prime Minister David Cameron cemented that this is indeed the case during his December meetings in China, a country whose own role within Basel III is similarly undetermined. The chancellor noted:
“The Prime Ministerâ€™s visit to China this week is the latest step in this governmentâ€™s determined plan to increase British exports to the faster growing emerging markets — something our country should have done many years ago.”
The power of the Asian market should not be underestimated, nor Britainâ€™s vulnerable position due to its rate of economic recovery. The two issues are tied thanks to Britainâ€™s reliance on exports for economic survival. As long as the countryâ€™s main trading partners are the struggling euro zone and the U.S., income from exports will not match the rate of growth. It appears that the economic forecast on a global scale is beginning to draw into focus ever more the presence of China as the worldâ€™s greatest economic power.
For Britain, no country is strategically more important than China. Its population includes one-fifth of the worldâ€™s children. It is the world’s second-biggest economy and has the largest standing army, yet it does not have the power of the U.S. and EU in terms of wielding influence in the global economy. This fact is evident in Basel III more than any other current international issue. Basel III does not take into account the logistical difficulties that the Asia Pacific region faces in implementing a regulated economy to match that of the rest of the worldâ€™s major economies.
Unlike Europe and the U.S., there is no overseeing financial body in Asia in regards to international financial law. As more banks throughout the EU and U.S. opt into Basel III, Asia will be unable to operate as it has previously done. China is a financially self-sustainable body with the rest of the region not far behind; it is crucial that this growing authority is heard in the debate for financial reform and regulation, rather than an EU- and U.S.-dominated approach. Regulations that work adequately in the EU and U.S. could cause greater risks in the Asian market, which at its current stage of development has vastly different banking industries and financial systems between countries.
My colleague Alasdair Robertson, partner at Maples and Calder, commented on the situation stating:
“An important issue that Asian economies are going to have to face is how to address the need for additional capital to fuel growth while at the same time acknowledging the impact of the Basel III requirements on the ability of banks in the region to be able to lend.”
â€œIn that context, it will be interesting to see if Asia can adopt collateralized loan obligation techniques, which have really assisted the U.S. economy to plug that potential lending gap. With the standardization of loan documents and the development of a secondary market this could be a very important part of financing in the region.”
A one-size-fits-all approach would not work in encapsulating the Asian financial system into that of the EU and the U.S. Rather, it needs to be inclusive of standards in the Asian market to avoid spillover effects from developed country regulatory changes and low interest rate policies, which lead to the migration of risky financial activities to Asia that could affect regional financial stability.
In the same vein, Britain appears increasingly determined to forge its own path on the international economic stage. In a letter to the Governor of the Bank of England Mark Carney, the British Chancellor revealed his support for a higher leverage ratio in the UK — suggesting that it was now the right time for the Financial Policy Committee to exert more power in the direction of the globally agreed upon leverage ratio. Since the news that Britain is drawing ever nearer to a position of financial stability was outlined only a week later in the Autumn Statement, this is a clear push for a move away from the unified regulations of Europe, and the dependence that Britain still has on its trade links in Europe and the U.S.
The proposed government-enforced higher leverage ratio for Britain would mean that banks are more able to absorb losses. The chancellor has remained certain that Basel III should be able to create a consistent financial regulation system, yet as Osborne has repeatedly stated in Brussels, the issue for Britain is of national sovereignty with his determination to steer away from a continent-wide agreement led by Germany, France and Italy.
PHOTO: Britain’s Chancellor of the Exchequer George Osborne (C) delivers a budget update at Parliament in London December 5, 2013, in this still frame taken from video. REUTERS/UK Parliament via REUTERS TV