OP-ED COLUMN - Promise of Basel III akin to MIST!
Published:Friday | September 17, 2010 | 12:00 AM
Last Sunday at Basel, Switzerland, bank regulators agreed new rules they claim will strengthen the world's financial services industry, immunising against a future Wall Street-type mid-September 2008 meltdown. Then, United States authorities abandoned Lehman Brothers to collapse. This set off the worldwide banking crisis that had been bubbling for years upon the pot of subprime mortgage lending and associated derivatives. All this was facilitated by the unwise dumping of Glass-Steagall in 1999, fuelled by Alan Greenspan's free-money policy to Wall Street banks coupled with greed among their principals, who became high-rolling casino gamblers - contrary to the picture we once had of conservative, yet innovation-enabling bankers.
Alan Greenspan, commenting upon the Iraq war in his September 2007 memoir, released almost one year to the hour before the 2008 meltdown, confessed to being "saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil." Well, it may be politically inconvenient to acknowledge that these new capital requirements and rules governing leverage ratios mean nothing without a return to a regulatory environment similar to the abandoned Glass-Steagall rulebook.
The politically inconvenient truth is that Wall Street and world financiers' hold over policymakers, in general, is the truly unmovable obstacle to an effective prudential and regulatory architecture for orderly global financial intermediation and wealth creation. President Obama's democrats are likely to suffer a mauling at the November polls as a result of their timid approach to reform. But this shows you the power. Bail out Wall Street then, when they are happily back to obscene bonuses, creating entirely useless money-churning derivatives, seek agreement on reform. This is not the act of holding feet to the fire. This is letting the monkeys into a field of ripe banana. It is not even like feeding them rum-laced molasses so a few endangered ones may be taken for breeding at the zoo! They get intoxicated, but the bonuses stagger. Main Street suffers the hangover.
That said, what are the proposed changes? First, the banks' capital reserve is to be triple what it once was - seven per cent of assets from the earlier two per cent. This is what is referred to as common equity or tier one capital: common shares and retained earnings. Of course, some bankers argue that these higher reserve requirements will cripple lending, increase costs to borrowers and reduce the potential for economic growth. To these criticisms, group chairman Jean-Claude Trichet, currently president of the European Central Bank, argued that on the contrary, the new rules will make a substantial "contribution to long-term financial stability and growth".
Generally, though, the view seems to be that while the new requirements will cause banks to be able to generate less profits from the same asset base, the overall system should be safer as a result of the bigger 'buffer', or impact-absorbing 'emergency airbag', to ward off insolvency. The proposed new rules must be approved in November by the G-20 nations prior to enactment by individual countries. Proposed deadline for adoption of Basel III, set by the experts - the Basel Committee on Banking Supervision - is January 1, 2013.
Stricter reserves
The most innovative of the new provisions is undoubtedly the "leverage ratio" requiring banks to maintain reserves of at least three per cent of total assets, including derivatives and off-balance sheet instruments i.e. reserves against all at-risk money. Some at the meeting argued for even stricter reserve requirements - up to 9.5 per cent in boom times. This has been left to countries' discretion.
Parting thought: For an absolutely amusing afternoon lyme, visit the Man-at-PP Lobby, a recently renovated sports bar. Nestled beneath the Blue Mountains on the Liguanea Plains at Hope Road, near Bob Marley's residence/museum in Kingston, there is no cover charge, just press on, sorry, just press pass through. Should West Indian spinners ever achieve ambient skills paraded here, we would remain world-beaters. Former Vice-chancellor of The University of the West Indies Aston Preston, in his inimitable down-to-earth style, described the 'nimbleness' of a particular negotiator as "Ramadin without long sleeves". Man-at-PP's Lobby tops this, yet Mr Brady, allegedly with no authority, delinquent on dues, retains firmness without vertigo at dizzying central executive heights, stubbornly attached and unmoved. Andrew Carnegie said: "He that cannot reason is a fool. He that will not is a bigot. He that dare not is a slave." In this context, for hundreds of years West Indians were slaves, not in the shackles on their feet, but in the shackles of the law!