My latest column in The Guardian, in the series “Power and Nations”:
Basel III: business as usual for bankers
Successful lobbying – or blackmailing – by banks means that financial regulation to prevent another crash is too weak to work
- guardian.co.uk, Monday 6 June 2011 19.00 BST
It turns out that the global political-economic system is about capital, after all. Capital explains what kind of system we are in; capital explains who runs it.
The global economy came very close to total collapse in the so-called “credit crunch” of 2008-2009; tens of millions lost their jobs; many economies have yet to recover. The meltdown was caused by too much risky lending by banks. There is a simple method to prevent another crisis: make banks hold more capital against their loans. The more capital a bank is required to hold, the less likely it is to fold when confidence collapses.
Nearly two years after the crisis, a long, grinding discussion among the 27 countries of the body charged with proposing new banking regulation finally produced the so-called “Basel III” rules. These rules are complicated but, in general, require banks to hold more capital against their loans.
In theory, all major economies are supposed to phase in the new requirements over the next few years. When the rules were announced, and when the G20 discussed them, the Basel III rules were heralded – by governments and banks – as major step to prevent a recurrence of the credit crunch.
So far, so reassuring, but behind the self-congratulatory rhetoric, a more disturbing picture is evident. It turns out that almost all banks will easily meet these supposedly stringent requirements.Many impartial experts do not think Basel III is sufficient to prevent another credit crunch. Academics from Stanford University and the Max Planck Institute regard Basel III’s equity requirements as “dangerously low”. And the EU looks like it may fail to implement the Basel rules fully in any case, as its proposed legislation is reported to offer various loopholes for banks to exploit. In the US, banks are already sidestepping the much vaunted “Volcker rule” to limit trading on their own accounts.
Switzerland, which, you might think, knows a thing or two about banking, reveals the weakness of the measures agreed elsewhere. It has unilaterally imposed far higher capital requirements on its banks, worrying that the relatively large size of the banking sector in the Swiss economy renders it especially vulnerable to banking collapse. But hang on a minute – the credit crunch and ensuing global collapse showed that the economy of the entire world, not just Switzerland, is dangerously exposed to bank failure. If Switzerland judges high capital requirements necessary, why don’t all governments?
The reason that other governments – the G20, including the US and the EU – have failed to impose sufficient curbs on banks’ risk-taking behaviour (which, in fact, risks all of our livelihoods) is simple. Whenever there is a prospect of more stringent rules, banking advocates rise as one to claim hysterically that economic growth will be dramatically cut, costing millions of jobs, just as our economies are struggling out of recession. Or they threaten that their banks will leave London, the EU, the US, or wherever tighter regulation is proposed. Jamie Dimon of JP Morgan Chase, for instance, recently hit both arguments, saying Basel III regulation would stifle US growth, while federal legislation (the Dodd-Frank bill) would drive business out of the US. Similar threats have been made to British legislators.
Neither argument withstands scrutiny. The OECD found that the Basel III rules would have a negligible impact on growth; some estimates suggest they might increase growth. If all countries imposed the same regulations, banks would have to go to the moon to escape them, thus negating shameless threats like Dimon’s to quit one country for another.
Of course, these are not the real reasons the banks do not like tighter rules. The real reason is that higher capital requirements reduce banks’ profits: the more banks are able to lend, the more money they make.
But these arguments barely need to be aired in public. In the obscuring fog of technical jargon (how many people know what “Tier 1 capital” is?) and subterranean influence-peddling, the bankers have, by and large, got their way. My bet is that even the feeble Basel III rules will be watered down, country by country, through a hundred amendments and delays. The necessary regulation has not been imposed, and will not be. The banks win; we lose. In order to maintain bank profits, the systemic risk to the global economy remains.
So we can see from this that capital – or rather banks – do, indeed, run the world.