Weakening or delaying regulatory responses to the financial crisis will not just embarrass authorities, it will also pave the way for the next meltdown in global markets.
Bank reforms need to be deposited, not withdrawn
Governments planning to impose tough capital and liquidity requirements on the banking sector must not be swayed by dire warnings from banks that the measures will choke off global economic growth.
The so-called Basel III reforms due to be introduced by the end of 2012 aim to prevent a repeat of the financial crisis by increasing the amount and quality of capital that banks must hold. That, regulators argue, will make the banking system more stable and more resilient to the kind of market crisis that forced many of them to beg governments to bail them out with taxpayers’ money in 2008.
The Basel committee on banking supervision proposed the new rules last December to implement a pledge from the Group of 20 (G20) leading and developing economies. Policymakers say the existing Basel II global accord left banks with too little capital to survive the financial crisis.
Banks say the new rules will force them to curb lending to such an extent it will seriously damage growth and jobs. Some estimates circulating in the financial sector say the reforms will slash as much as 5 per cent off world growth, an outlandish prediction way above a forecast from the Dutch central bank, for example, of a cumulative hit of 0.5 to 1 percentage point over several years.
Deutsche Bank, Germany’s largest bank, has argued that future profits alone will not enable it to raise the huge amounts of capital needed to meet the capital requirements under Basel III.
But it is hard to muster any sympathy given the role leading banks played in the financial crisis, their persistent payment of massive bonuses, and the fat profits they have been chalking up in recent months. Deutsche Bank reported a 49 per cent jump in net income in the first quarter, fuelled by a surge in investment bank earnings.
No doubt financial institutions will also be booking healthy profits from the current market turmoil engulfing the euro zone. It’s intriguing to think of the bonuses investment bankers will be getting in December from the money they earned during the Greek crisis.
Given the hundreds of billions of euros of government money that has already been spent on shoring up the financial sector, the banks’ complaints about tougher capital rules seem breathtakingly brazen.
The growth argument simply doesn’t ring true.
Over the long term, growth would be more likely to receive a boost from the improved market stability that would result from tighter capital rules. Besides, it’s a bad time to argue against greater prudence, just when Europe is on the brink of a second crisis and its governments are once again shelling out billions to keep the financial system going.
Like in 2008, that money is going towards protecting the banks, albeit indirectly this time. The impact on major financial institutions of a debt default by Spain, Portugal and Ireland would be unthinkable.
The banks have realised that the general public is still so angry at them over the credit crunch that it makes little sense to try to block the Basel III reforms outright.
That is why they are pushing for the changes to be watered down as much as possible, and delayed.
And it seems as though they have had an initial victory.
Timothy Geithner, the US Treasury secretary, and the EU financial services chief Michel Barnier announced last Wednesday they would work towards a common date next year to introduce the Basel trading book rules, in co-ordination with the Basel committee on banking supervision.
The Basel committee of central bankers and regulators had agreed the trading book rules would take effect from the end of this year.
Policymakers must stand firmer and fight to keep the reforms intact. After all, Basel III is the G20’s main regulatory response to the financial crisis. If it were significantly weakened or delayed, it would not just be a huge embarrassment for authorities.
It would also allow banks to pave the way for the next meltdown in global markets in their pursuit of maximum profit.