Basel Accord, like Dodd and Frank, doesn’t know beans about banking

Bank capital rules are irrelevant for world growth.

Bank capital arises endogenously from the economy to meet regulatory needs.

Banks price loans to realize risk adjusted rates of return needed to raise any needed capital.

Banks lending suffers only if non bank sources offer loans at better terms.

Therefore all this banking news is mainly relevant to underwriters of new capital who will profit enormously.

And we all know who those infinitely clever ones are as they again fool enough of the people enough of the time to stay highly profitable.

And everyone seems to have missed the fact that each nation is best served by making its own capital rules.

When it comes to bank capital rules, nothing is gained by international cooperation (apart from generating international underwriting fees for the world’s underwriters).

Ironically, this lone area of actual, effective international cooperation is also the one area where all are best served by going it alone (apart from generating international underwriting fees for the world’s underwriters).

Who would have thought…

ECB’s Ordonez Says Transition Period for Basel Rules Sufficient

Sept. 13 (Bloomberg) — European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said banks will have a sufficient period of time to comply with the new Basel rules on banking regulation.

“We have a transition period that’s enough for everybody,” Ordonez told reporters in Basel, Switzerland, today. “I’m very, very happy with the result.”

The new accord “finishes uncertainty” because banks are now aware of capital requirements, buffers and the timeframe to phase-in the new rules, he said. The decision on the new regulation was taken unanimously, he added.

Zapatero Says Decision on New Basel Rules Is ‘Good’ Move

Sept. 13 (Bloomberg) — Prime Minister Jose Luis Rodriguez Zapatero said the decision on new banking rules is a “good” move. He spoke at a news conference in Oslo today.

Lagarde Calls Basel Accord’s 7% Capital Rule an ‘Achievement’

Sept. 13 (Bloomberg) — French Finance Minister Christine Lagarde comments on yesterday’s international agreement to raise capital requirements on banks. She spoke to reporters today in Oslo.

The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress.

“It’s a significant progress.
“Our purpose was to improve the quality and the quantity of capital held by banks in order to avoid the recurrence of risk.
“Moving to 7 percent is clearly an achievement.”

This entry was posted in Banking and tagged . Bookmark the permalink.

11 Responses to Basel Accord, like Dodd and Frank, doesn’t know beans about banking

  1. James says:

    September 17, 2010

    Ellen Brown

    Author, Web of Debt
    Posted: September 17, 2010 02:25 PM

    Basel III — Tightening the Noose on Credit

    The stock market shot up on September 13, after new banking regulations were announced called Basel III. Wall Street breathed a sigh of relief. The megabanks, propped up by generous taxpayer bailouts, would have no trouble meeting the new capital requirements, which were lower than expected and would not be fully implemented until 2019. Only the local commercial banks, the ones already struggling to meet capital requirements, would be seriously challenged by the new rules. Unfortunately, these are the banks that make most of the loans to local businesses, which do most of the hiring and producing in the real economy. The Basel III capital requirements were ostensibly designed to prevent a repeat of the 2008 banking collapse, but the new rules fail to address its real cause
    [...]
    Punishing Your Local Bank for Wall Street’s Misdeeds

    What precipitated the credit crisis and bank bailout of 2008 was not that the existing Basel II capital requirements were too low. It was that banks found a way around the rules by purchasing unregulated “insurance contracts” known as credit default swaps (CDS). The Basel II rules based capital requirements on how risky a bank’s loan book was, and banks could make their books look less risky by buying CDS. This “insurance,” however, proved to be a fraud when AIG, the major seller of CDS, went bankrupt on September 15, 2008. The bailout of the Wall Street banks caught in this derivative scheme followed.

    The smaller local banks neither triggered the crisis nor got the bailout money. Yet it is they that will be affected by the new rules, and that effect could cripple local lending. Raising the capital requirements of the smaller banks seems so counterproductive that suspicious observers might wonder if something else is going on. Professor Carroll Quigley, an insider groomed by the international bankers, wrote in Tragedy and Hope in 1966 of the pivotal role played by the BIS in the grand scheme of his mentors:
    [T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.

    The BIS has now become the apex of the system as Dr. Quigley foresaw, dictating rules that strengthen an international banking empire at the expense of smaller rivals and economies generally. The big global bankers are one step closer to global dominance, steered by the invisible hand of their captains at the BIS. In a game that has been played by bankers for centuries, tightening credit in the ebbs of the “business cycle” creates waves of bankruptcies and foreclosures, allowing property to be snatched up at fire sale prices by financiers who not only saw the wave coming but actually precipitated it.

    Reply

  2. roger erickson says:

    “What is the North star of capital?”

    The basis for every valuation – currency or otherwise – is public initiative in the issuing country, and how much respect other populations have for the issuer. The most potential in any capital position always flows from ability to further leverage interaction & coordination with local populations.

    Bankers, by definition, are the most conservative in valuing options. Bankers can only give you the sum of existing parts – presuming they can even guarantee current coordination value. Only people with imagination can produce from any situation a whole that is greater than the sum of its parts. For “capital”, I’d take a Gen. Patton, or a professional army, or a motivated citizenry, over any bank, or banker, anywhere.

    Reply

  3. Winslow R. says:

    “The measurement of risk, the quality of capital, the quantum of capital, and the effective strength of capital as first loss support are all variable in the way they are measured and all interrelated. ”

    In regards to quality of capital….

    From what I understand, the simplest way a bank can raise bank capital is by selling bank stock.

    What is there to keep the bank from setting up an unregulated offshore hedge fund to purchase the bank stock? Yes, the unregulated hedge fund needs to be funded. So they go to a bank. For every dollar of funding provided by the bank they are able to purchase a dollar of stock. For every dollar of stock purchased, the bank can fund the hedge fund with 10 additional dollars, assuming a 1:10 capital:loan ratio. This capital ratio is conservative given the new Basel guidelines.

    It would seem Basel’s low capital ratio of 7%? or 2.5%? would cut the take of the offshore hedge funds, but still will benefit the ‘world’s underwriters’ as it provides the fig leaf of a new capital rule for political protection.

    “Some reference point for capital standards is an essential reality anchor for the system. There’s nothing wrong with an international/global reference point for such standards.”

    How does this provide a reference point? What is the North star of capital?

    Reply

    JKH Reply:

    “What is there to keep the bank from setting up an unregulated offshore hedge fund to purchase the bank stock?”

    Capital requirements and sensible capital arbitrage deflection. Depending on what “setting up” implies for the entire capital structure of the hedge fund, the bank loan to/equity in the hedge fund could be up to 100 per cent risk weighted and up to 100 per cent capital requirement, effectively eliminating the usefulness of that capital on a net basis. No arbitrage allowed in a reasonably intelligent capital attribution paradigm.

    “What is the North star of capital?”

    Either you believe in capital regulation or you don’t. If you don’t, good luck. If you do, regulation is the North Star – be it national or global, or the combination of the two. Obviously, any nation is free to deviate from global regulation if it chooses, but its participation in global banking will be limited accordingly.

    Reply

    Winslow R. Reply:

    “Capital requirements and sensible capital arbitrage deflection. Depending on what “setting up” implies for the entire capital structure of the hedge fund, the bank loan to/equity in the hedge fund could be up to 100 per cent risk weighted and up to 100 per cent capital requirement, effectively eliminating the usefulness of that capital on a net basis. No arbitrage allowed in a reasonably intelligent capital attribution paradigm.”

    The reason banks hire financial ‘geniuses’? Are we really having this conversation?

    For a little extra complexity just add a triple AAA rated corporation into the circle of bank capital generation.

    “Either you believe in capital regulation or you don’t.”

    How about sometimes believing? I haven’t for years. Why should I? Right now I don’t, and won’t as long as banks/corporations are allowed to own/lend to unregulated hedge funds backstopped with government guarantees.

    Why believe in tinkerbell when we could create a legitimate ‘circle’ for bank capital creation?

    Why should Basel based bank capital emerge from the bank lending to the AAA corporation which lends/invests to/in the hedge fund which buys bank stock?

    Shouldn’t the North Star of Tier 1 capital be limited to some other form, like treasury bonds (the new gold)?

    Basel is a political attempt to keep domestic politics from shutting down our current self-generating bank capital based system.

    Reply

    WARREN MOSLER Reply:

    bank capital has it’s functions as previously described

    Reply

    WARREN MOSLER Reply:

    banks can’t fund hedge funds like that

    Reply

  4. JKH says:

    I disagree totally with your take on capital.

    “Banks price loans to realize risk adjusted rates of return needed to raise any needed capital.”

    They don’t price loans to realize risk adjusted rates of return; they price them to expect those risk adjusted rates of return. The fact that realizations may differ from expectations is fundamental to the nature of risk and the purpose of capital. The purpose of capital is to absorb unexpected losses.

    If realizations equalled expectations, unexpected losses would never occur (which is a logical contradiction in the nature of risk) and banks would never have to raise capital externally. The nature of cycles and risks and reality demonstrates otherwise.

    The measurement of risk, the quality of capital, the quantum of capital, and the effective strength of capital as first loss support are all variable in the way they are measured and all interrelated.

    Some reference point for capital standards is an essential reality anchor for the system. There’s nothing wrong with an international/global reference point for such standards.

    Reply

    WARREN MOSLER Reply:

    agree with all except the last bit about the value of an international standard or reference point.

    we insure our banks which are part of our public infrastructure operating for public purpose. Why do we care how other nations do it?

    Reply

  5. hbl says:

    “Bank capital rules are irrelevant for world growth.”

    Really?? I’d be curious as to your take on these BIS papers summarized by Felix Salmon (I admit I haven’t read the papers and I know MMT commentators often criticize BIS output for good reasons):

    http://blogs.reuters.com/felix-salmon/2010/09/10/why-basel-iii-wont-hurt-banks-or-the-economy/

    Felix summarizes that “at just about any realistic point on the graph, higher capital ratios increase the long-term growth rate” and “Most of the benefit comes from smaller and less harmful financial crises”.

    Is your counter-point (if I understood correctly what you’ve written in the past) simply that every banking crisis should be met with regulatory forbearance and full federal guarantee of all deposits (even over FDIC limits) and bank bondholders?? If so there’s both the question of why that should be (I think you’ve answered this before so I need to review more carefully to understand better) but also the question of is this really the world we live in, that such a policy response is a given worldwide? If it’s not a given, then don’t capital ratios still matter in providing “shock absorbers” across asset price booms and busts?

    Reply

    WARREN MOSLER Reply:

    any slip in aggregate demand, output/employment, etc. can be met with a fiscal adjustment.

    and yes, capital ratios function to shift pricing of risk to the private sector from the public sector.
    (banks can function without private capital, but the public sector prices the risk)

    and yes, bank losses need not result in business interruption for the real economy.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>