Will the Basel III Bank Regulations Change Anything? → Washingtons Blog
Will the Basel III Bank Regulations Change Anything? - Washingtons Blog

Monday, September 13, 2010

Will the Basel III Bank Regulations Change Anything?

The much-trumpeted Basel III increase in capital requirements will not be fully phased in until 2019.

Many are criticizing the slow pace of implementation, including Joseph Stiglitz:

“While it’s understandable given the weaknesses and the failings of the banking system that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk,” said Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank and now a professor of economics at Columbia University in New York. “Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”
And Pimco's Mohamed El-Erian:

“The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts.”

The former chief economist for BIS - William White - says that banks aren't lending because consumers are tapped out, not because of capital requirements, and therefore:

Tightening regulation and capital requirements will not hurt the economy as much as might otherwise have been expected…
In other words, White debunks the idea that raising capital requirements too quickly will curtail lending and hurt the economy.

Phillip Hilderbrand, Chairman of the Swiss National Bank, points out that Basel III doesn't address the too big to fails:

While the reform package is far-reaching, it does not yet comprehensively address the TBTF ("too big to fail") problem. Further efforts will be required in that area at the international and at the national level.

Yves Smith notes:

Valuation: the capital ratios mean nothing if the assets are overvalued. Waldman is always going on about this. It ends up as quite a radical critique: capital ratios without valuation reform = cart before horse.

Accounting: there is still no harmonization of accounting practices on all the shadow banking apparatus: for instance, special purpose vehicles, derivative netting and repos. Actually, of course, when you come across things like Repo 105, or BoA’s quarter end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool probably is an outlier, some of this stuff really, really needs fixing. And do we think that under Basel III there will be more accounting dodges that will cross the line from ‘asset sweating’ to ‘accounting manipulation’? Not Basel III’s fault, but I rather think we do expect exactly that.

Regulatory risk weightings are still a mess, with the ratings agencies still ensconced as the arbiters of credit quality.

Then of course there is shadow banking, which Basel III largely dances around. One particularly glaring example is the whole custody/client money/asset segregation/rehypothecation/title mess in London. There’s not a peep, burble or whisper here in the UK about the sort of legal reforms (somewhat in the manner of the US’s 1934 Securities Act, perhaps, plus a UK version of SIPC) that would sort this out. Recent Lehman-related rulings on Client Money actually mess the situation up even more.


I have nothing to say about enforcement; it’s been such a long time since I’ve seen any that I’ve forgotten what it is.

In the end, these and other regulatory arbs are all consequences of politics. Pending some unimaginable transformation there, in which regulators somehow acquire the discretion to pick fights with banks, [things won't look very different from how they did before the last crisis].

Karl Denninger writes:

In absolute terms....

1 / 0.045 = 22:1 absolute maximum leverage.

1 / 0.07 = 14.3% leverage beyond which no dividends may be paid.

Sounds rather reasonable, doesn't it?

Well, the latter is. Indeed, it's about what the former legal limit was before Henry Paulson, as head of Goldman, got the SEC to lift it from the investment banks.

An act that, as I have repeatedly pointed out for three years, made possible the blow-off top in both housing and the debt markets, and materially increased the amount of damage done by the financial crisis.

But none of these figures matter a bit unless banks are forced to value assets fairly. And until we see the FDIC stop coming in and taking losses on banks that according to their alleged "call reports" are perfectly solvent, we will not have seen the end of the lies.

I'm sorry folks, but this is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds of billions or even more than a trillion - each - off balance sheet without no clean accounting for the value of the alleged "assets", and they both are and do.

By some figures many European banks are running actual leverage ratios closer to 50:1, mostly for the same sort of reasons. The so-called "stress tests" ignored anything not held in a trading book, which was dramatically more than the "trading" amount, and leaves open to question whether there was some hinky re-shuffling ahead of the so-called "test" as well.

The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.

Yeah, that's one of the scams that has been run too - so-called "liquid assets" that aren't really liquid.

Hint: Only short-term (say, 26 week and less) government bonds and cash are truly liquid assets, as only debt instruments without material duration risk and actual vault cash can be counted on to be turned into cash during a liquidity squeeze. Don't hold your breath on the Basel Clowns restricting the definition to these instruments - in fact, I'll bet anyone a case of Scotch they won't.

Even CNBC is skeptical:

The historic banking reforms agreed in Basel over the weekend are pointless and won't stop the next crisis destined to hit the markets, Alpesh Patel, principal at Praefinium Partners, told CNBC Monday.

"In so many ways, it's so irrelevant," Patel said. "Crashes tend not to repeat themselves in the same manor, so we're fighting the last battle."


Patel also criticized the longer-than-expected lead time that financial firms are allowed in which to implement the changes.

"The other problem with this is that the regulators have shown quite a degree of leniency time and time again… they don't to make the really tough decisions because they're too afraid of spooking the markets," he said.

The bottom line: capital requirements might be helpful if other - more fundamental - reforms are implemented. But unless core reforms are implemented, nothing will change.


  1. In 2009 speculative, unregulated derivatives was the Worlds largest market at an estimated 600 Trillion; Wall Street controls an estimated 400 Trillion of that world derivatives market.

    The Worlds total economic output was an estimated 58.07 Trillion and the total World bond market was an estimated 82.2 Trillion.

    The implementation and manipulation of (Bush administration) derivatives is the World Banksters/Big Oil Weapon of Mass Destruction and it is not American Empire that they desire, indeed, it is American Empire and Democracy that they want to destroy in order to implement the New World Order. The New World Order capital will be in Dubai.

    Liquidity dog and pony show—Ha. Ha.—bank off balance sheet accounting—ha. Ha.—secret balance sheet of the Federal Reserve Ha. Ha. Americans do not even know how much money they owe, it’s a secret!

    Are Americans stupid? No, they are just propagandized and brainwashed; Obama will spend 50 billion to create a handful of jobs in the U.S and spend 500 billion to propagandize the American people to support of the Afghanistan War.

  2. It is impossible not to see now that the financial regulators in the Basel Committee, trying to fend off a bank and a financial crisis, constructed an incredibly faulty Maginot Line.

    It was built with lousy materials, like arbitrary risk-weights and humanly fallible credit rating opinions.

    And it was built on the absolutely wrong frontier, for two reasons:

    First, it was build where the risk are perceived high, and where therefore no bank or financial crisis has ever occurred, because all those who make a living there, precisely because they are risky, can never grow into a systemic risk. Is being perceived as risky not more than a sufficient risk-weight?

    Second it was built where it fends of precisely those clients whose financial needs we most expect our banks to attend, namely those of small businesses and entrepreneurs, those who could provide us our next generation of decent jobs and who have no alternative access to capital markets.

    Now with their Basel III the Basel Committee insists on rebuilding with the same faulty materials on the same wrong place and it would seem that we are allowing them to do so.

    I am trying to stop them… are you going to help me or do you prefer to swim in the tranquil waters of automatic solidarity with those who are supposed to know better?

    The implicit stupidity of the Basel regulations could, seeing the damage these are provoking, represent an economic crime against humanity!

    Per Kurowski
    A former Executive Director at the World Bank (2002-2004)

  3. Thank you for the post! Great article!

    For a concise summary of Basel II vs. Basel III see the following link:


  4. Only the dead have seen the end of war. Plato

    There is no way to zero risk in banking, this is for sure. Basel iii is not perfect, but it is better than Basel ii.

    The framework improves consistency and establishes risk management principles that are unique.

    Yes, we will have another crisis in the future, this is also for sure. It is simple: Passing laws against robbery and murder has not stopped people from robbing and murdering.

    To ban or not to ban taking risks? More strict banking rules can destroy the economy. Banks will not be willing to lend. What is next? Unemployment, bankruptcies, no mortgages …

    Banks are (and must be) in the business of taking risks. Sometimes governments force banks to lend to at-risk borrowers, and decisions are based on government intervention, not risk management. Is there a framework against that? Can we blame Basel iii?

    We can increase the likelihood that banks can absorb losses under certain circumstances. This is all we can do.

    George Lekatis


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