Basel III: it sounds like the title of a kitschy epic or an imperial reign. In fact, it's a new set of international rules supposed to prevent another financial crisis. American news may be paying little attention to Basel III, but if you head over to the Financial Times, you'll get a sense of just how important these rules are to a certain set. So what does this new agreement do? Will it be effective? Though there's some disagreement on the particulars, economics commentators generally view Basel III as a step in the right direction.
- What Basel Does "The standards are complicated, but they should build better banks," explains The Atlantic's Dan Indiviglio. "Basel III is all about capital.
Capital is the amount of high quality assets a bank must hold to
cushion against losses." He lays out the components of the agreement in
a handy list:
1. More Capital ...
2. Better Capital The definitions of these ... capital have also been tightened, to focus on higher quality assets. ...
3. Bubble Busting ... there's also a measure to ensure that banks build up more padding during the upswings the protect against the downturns ...
4. Better Liquidity ... Basel III will be the first time regulators would have a numerical standard for liquidity. ...
5. Timing Finally, the new rules provide a clear timeline for when and how these changes should be implemented. The process will be quite gradual, not in full effect until 2019. But the implementation will be done in a very smart way, providing benchmarks within the process to ensure that banks are on the way to full compliance ...
- This Is Going to Change the Way Business Is Done, assert Tom Braithwaite and Francesco Guerrera
in the Financial Times. "Even if most US banks can avoid a
rush to raise equity to meet an eventual core tier one capital ratio of
7 per cent of risk-weighted assets, they are likely to make changes to
their business models and balance sheets, according to officials,
consultants and banks themselves." Braithwaite and Guerrera also note
that "The Basel agreement chimes with US financial reform legislation
in its broad outline but the international committee has yet to agree
on important parts, including the regime for 'systemically important'
institutions and new liquidity rules." U.S. financial reform legislation
might move ahead before this part is hashed out internationally.
- 'Basel II: We Lost, the Banks Won' Business Insider reposts finance blogger Ilargi's argument on The Automatic Earth that Basel III is the creation of banking interests, and it shows: "even the 10-years-from-now requirements don't have a denominator yet."
- Problems and Weaknesses in Basel Some experts take a more skeptical view. Christine Harper collects comments in a piece for The Washington Post. Economist Joe Stiglitz thinks it's dangerous to "delay" phasing in the capital requirements, and that "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 [the banks] cannot more rapidly increase their own capital." Richard Spillenkothen is more optimistic, but says "there's still a lot of other issues that need to be addressed," while Paul Miller says frankly that "Basel blinked ... Most of the banks in the U.S. already meet the criteria." The agreement couldn't "come out tougher ... in reality ... because of the position of the European banks."
- But Overall, a Good Start "There are still weaknesses that banks will almost certainly try to exploit to reduce the amount of capital they must set aside," admits The New York Times editorial board, but "the new rules are a considerable improvement over the status quo, and the United States and the other members of the Group of 20 leading economies should endorse them." Here's their big caveat:
Even then, the rules will only be as good as the commitment of national regulators, starting with the Federal Reserve and the Federal Deposit Insurance Corporation. And given the international nature of banking --any global regulation will only be as strong as the weakest regulator.
- 'There Will Always Be Cynics and Nay-Sayers,' points out Reuters's Felix Salmon. Though plenty of these folks are experts, "most [of their criticisms] are based on some variation on a simple, defeatist theme." In Salmon's view, it's better to at least try to "reduce systemic risk," as the Basel III accord has done. The Basel process was skilfully "depoliticiz[ed]," he notes. For that, he thinks some praise is due:
Under previous administrations, financial regulations were quietly loosened, with disastrous results: think of the way that the SEC allowed almost unlimited leverage at investment banks in 2004, for instance. This time around, financial regulations are being quietly tightened. That's a good thing and should definitely count as a signal achievement of the Obama administration. Even if the president himself isn't going to make a major television address to trumpet it.