Basel III -fighting the last war

The agreement at Basel will require banks in due course to have safer levels of capital.

There were two main problems with the proposals. The first is requiring a sudden surge in new capital now might just delay or slow recovery, as the easiest way for banks to meet the requirements is to lend less. The Basel answer is to delay the introduction of the new demands by up to eight years.

The second is the new rules require banks to hold more government loans or sovereign debt, at a time when the quality of sovereign debt in some countries is being questioned for good reasons. Governments may like the idea of banks having to lend them money, but it only delays crisis and painful adjustment in countries that are borrowing too much. It does not solve their underlying problem.

Basel will also encourage the shift of some financial activities into non banks. Do not expect too much from Basel. It has not guranteed an end to crises! Meanwhile, watch out for another bout of Euro blues, as the numbers within the weaker countries of the Euro zone still look worrying.

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2 Comments

  1. waramess
    Posted September 13, 2010 at 10:30 am | Permalink

    What is distressing about Basel III is that the rules are set by regulators, modified through negotiation by banks and will then conclude by the banks spending many man hours devising schemes to get round the regulations.

    Banks are indeed encouraged by shareholders to maximise returns by keeping equity as low as possible, and they spend as much time devising ways round the capital adequecy rules as regulators do in establishing them.

    This is a great moral dilemma because it seems the regulators are striving to save the banks from themselves whilst the banks strive to save themselves from their shareholders. Ultimately they all know that come the next crash the taxpayer will bail them out.

    The only thing that will save the banking system is to have a robust system of liquidation where retail deposits are given preference and taxpayer money is never again a considered option. Allow the markets that lend the money decide on the leverage and decide which banks might repay their loans.

    We are going down a ruinous road led by a socialist regime and the return to sanity will be hard.

  2. Derek Buxton
    Posted September 19, 2010 at 1:25 pm | Permalink

    Do I not recall that the previous Basel rules caused many of the problems by the strict rules, what was it now, something about daily pricing. The banks could of course pay better interest rates on deposits to bring in more cash. Any savings that we have are being decimated by the ridiculous interest rates. Combined with high inflation, the government is stealing those savings, savings that the sensible put by for emergency use in old age.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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