Newspaper article International Herald Tribune

Bank Rules Give a Nod to Reality

Newspaper article International Herald Tribune

Bank Rules Give a Nod to Reality

Article excerpt

The loosening of the Basel III requirements for bank reserves might seem like a giveaway to the banks, but it is simply an acknowledgment that tougher rules could have tipped the world back into recession.


When a global committee of regulators and central bankers agreed to a new set of rules for the banking system a year and a half ago, Jamie Dimon, the chief executive of JPMorgan Chase, told The Financial Times: "I'm very close to thinking the United States shouldn't be in Basel anymore. I would not have agreed to rules that are blatantly anti-American."

Over the past weekend, Mr. Dimon finally got what he had wanted: a form of deregulation of sorts. The new international capital requirements for banks, known as Basel III, were significantly relaxed by regulators.

Instead of requiring banks to hold, by 2015, certain amounts of assets that can quickly be turned into cash, the most stringent deadline was pushed to 2019. Perhaps more important, the rules for the types of assets that could be counted in a bank's liquidity requirement were changed to be more flexible -- including securities backed by mortgages, for example, instead of simply sovereign debt.

This sounds boring, but it is important stuff. Increasing bank capital and liquidity requirements -- think of it as the size of a bank's rainy day fund -- is arguably more significant than all of the new laws in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The more capital a bank is required to hold, the lower the chance it could suffer a run, as Lehman Brothers did in 2008.

Given memories of the financial crisis, the idea that regulators would loosen rules even a smidgen is considered a huge giveaway. The conventional wisdom is that the banks are the big winners and the regulators are, once again, patsies, capitulating under pressure to the all-powerful financial industry. The headlines tell the story: "Banks Win 4-Year Delay as Basel Liquidity Rule Loosened," Bloomberg News declared. The Financial Times splashed, "'Massive Softening' of Basel Rules." "Bank Regulators Retreat," The Huffington Post said. Reuters described the new regulations as a "light touch."

Mayra Rodriguez Valladares, managing principal at MRV Associates, a regulatory consulting firm, put it this way: "With every part of Basel III that is gutted, we are increasingly back where we were at the eve of the crisis." She went on to say, "In today's financial world, regulators pretend to supervise while banks pretend to be liquid."

But that is a knee-jerk response.

While there is no question that the original rules would do a better job of preventing the next 100-year flood in the banking system, their quick adoption might have created a drag on the economy because bank lending would probably have been curtailed. …

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