Tag: Basel III

Thomas Hoenig Read All of Basel III . . .

By James Kwak

. . . and doesn’t like what he sees. In a post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, the former president of the Kansas City Federal Reserve Bank echoes some of the issues raised by Andrew Haldane, which I discussed earlier. The core problem, for Hoenig, is that Basel III “promises precision far beyond what can be achieved for a system as complex and varied as that of U.S. banking.” Banks were able to arbitrage the risk-weighted capital requirements of Basel II? Well, we’ll close all of those loopholes, one by one. But this cannot be done, given the incentives and power imbalances at work: “Directors and managers . . . will delegate the task of compliance to technical experts, and the most brazen and connected banks with the smartest experts will game the system.”

Continue reading “Thomas Hoenig Read All of Basel III . . .” →

Basel, Tomato, And Mozzarella

By Simon Johnson

The bank lobbyists have a problem.  Last week, they lost a major battle on Capitol Hill with the failure to suspend implementation of the new cap on debit card fees.  Despite the combined efforts of big and small banks, the Corker-Tester bill attracted only 54 votes in the Senate – when it needed 60. 

On debit cards, the retail lobby proved a surprisingly effective counterweight to the financial sector.  On the next big issue, the bankers have a different problem: it’s highly technical, more within the purview of regulators than legislators, and often perceived as boring.  Or, as one bank executive put it to Reuters, speaking of the capital requirements agreed between countries in the so-called Basel III framework,

“When you do mention Basel, your average member of Congress thinks ‘that pairs well with tomato and mozzarella.’” Continue reading “Basel, Tomato, And Mozzarella” →

Top Finance Experts To G20: The Basel III Process Is A Disaster

By Simon Johnson

The Group of 20 summit for heads of government this weekend will apparently “hail bank reform,” particularly as manifest in the Basel III process that has resulted in higher capital requirements for banks. According to leading authorities on the issue, however, the Basel process is closer to a disaster than a success.

Bank capital can be best thought of as the amount of financing of a bank’s operations (lending and investment) that is covered by equity and not by debt obligations. In other words, it describes how much of the assets of the bank are subject not to the “hard claim” of debt but rather to a residual or equity claim, which would not lead to distress or insolvency when the value of the asset goes down. For global megabanks, equity capital is thus a key element in preventing the failure of an individual institution (or a couple of banks) from bringing down the financial system.

The framing of the Basel “success,” according to officials, is that the big banks wanted to keep capital standards down — and this is definitely true — but that governments pushed for requirements that are as high as makes sense. The officials implicitly conceded the banks’ main intellectual point, that higher capital requirements would be contractionary for the economy. Continue reading “Top Finance Experts To G20: The Basel III Process Is A Disaster” →

Basel III: The Fatal Flaw

By Simon Johnson

The international discussion among government officials regarding bank reform is, at an informal level, going better than you might think.  Top people in the “official sector” are increasingly willing to confront the banking lobby and even refute its more egregious claims, particularly the completely erroneous notion that making banks safer – by requiring them to hold more capital – would actually hurt the broader economy and undermine growth.

Unfortunately, the structured intergovernmental process that actually changes the rules around banks – known as Basel III (or “Basel 3”) – was rushed to an unsatisfactory conclusion last weekend.  The US and other countries with major financial centers will need to add substantial additional capital requirements at national levels if these new rules are to be at all effective. Continue reading “Basel III: The Fatal Flaw” →