Damian Paletta offers a preview of the high-stakes debate in Basel, Switzerland, over new global banking rules that will set the amount of capital firms must hold in reserve, and the amount of dollars they can borrow for every dollar they have in that reserve.
Part of the problem is that having different standards for different countries gives a competitive advantage to banks from countries whose capital standard is lowest because the banks there have more money to lend.
Officials at the Basel Committee on Banking Supervision don’t expect each country to adopt exactly the same standard. Rather they want the countries to harmonize the rules they adopt, meaning that they apply them in a way that doesn’t give an advantage to one set of banks.
Sounds fair, but the French didn’t like the way the U.S. wanted to design the rules. Neither did the Germans. The Japanese and Danish had their own concerns.
Meanwhile, the Australians and the Canadians, who saw their banking sectors emerge from the financial crisis relatively unscathed, were wary of subjecting their institutions to new, untested rules that were mostly designed to address problems in Europe and the U.S.
Paletta explains that the size of the capital requirement, which has shifted around a bit, could resolve to 7-8%, including a buffer that would only kick in during tougher times. Expect an extended time period to gradually shift international banks into this new regime. Already, Basel negotiators have changed their definition of capital in ways more favorable to the banks.
The plan is to have an agreement in place by the middle of September, in time for a meeting in Basel. Then, the plan would get submitted to the next G20 summit in South Korea in November.
In addition to influencing the Basel process, big banks want to effect the rulemaking process in the SEC and the CFTC, particularly around derivatives, those risky “financial weapons of mass destruction” that at least partially caused the last crisis.
On Aug. 20, the Commodity Futures Trading Commission and the Securities and Exchange Commission sponsored an open forum on derivatives regulation. Industry representatives, trade groups, investor advocates and regulators discussed how to put into practice Congress’s desire for a more closely supervised market in derivatives.
Because the most potentially nuclear forms of derivatives are privately arranged and loosely monitored, two clear goals of the legislation are greater price transparency and the opening of transactions to more market participants.
But not everyone wants these aims to be met. And early signs indicate that the big firms currently in control of the derivatives market view the rules-writing process as an opportunity to maintain the status quo in one of their most lucrative lines of business — or win back what they feel they lost amid the legislative wrangling earlier this year.
The question is this: Will regulators give Wall Street’s big dealers what they want in a second bite of the apple?
Good question! As I’ve been saying for months, this is where the Dodd-Frank bill will actually get written, and its effectiveness determined. On one side you have the banks who run the derivatives markets trying to preserve their profits. On the other you have… well, you have a piece of paper from the Congress, which is full of potential loopholes just waiting to be exploited, and a few consumer advocates. Regulators have competing goals, or at least goals that distract from one another. They want to ensure price transparency for every trade, and exchanges or clearinghouses as the mechanism. But they also should want to increase the swap participants, so that the market doesn’t get concentrated, adding to risk.
This could end well, or with literally no meaningful changes at all. Banks are placing a lot of money to ensure the latter.



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Lots of problems with the framing. Here’s 2:
1. “Harmonizing” is code for U.S. strong arming the rest of the world into the lowest common denominator.
2. It is absolutely NOT the case that the lack of the same rules everywhere would cause all financial biz to gravitate to the lowest common denominator. The fact that the Europeans got sucked into contagion from the U.S. housing bubble suggests the opposite, namely that a lot of the financial biz will gravitate to where the financial system is the most robust to avoid that kind of contagion.
And here is a perfect example of why business is going to stay down. Until the 243 rules yet to be written (any of which might wipe out a particular business) come down, nobody is going to risk investing or hiring.
In this particular case determining a capitol ratio is nice, but not an immediate concern. No one wants to borrow, which is the only mechanism the Fed has to influence money supply.
Uncertainty is a BS argument, perpetrated by Wall St to forestall effective regs.
Biz will start hiring as soon as consumer demand returns. Catch is, consumers have no wherewithal to spend. So even if the future of all regulations were known with certainty (and when was it that biz EVER acted under complete certainty), it still wouldn’t hire or lend because there’s little consumer demand.
Jane has a fresh cross-post up: Just Say Now: Facebook, Google and the Reddit Revolt
Not sure “gravitate to the lowest common denominator” is not true. We have many financial institutions sharing the same 5 employees in various off shore tax havens (there is a 5 employee minimum for your corporate sub as “new jobs” justification for the tax breaks). We have “back to back” transactions where event in one country is deemed offset by event in second country because the EU (and Canadian) regulator allows it – not a problem unless one of the countries is allowing what you the regulator do not want to be allowed. We have all countries (except the US in its foreign tax credit game) NOT TAKING A WORLD VIEW – tax is for events we can proved occurred in our borders – but since value added can be assigned to tax havens, countries do not collect tax from corporations (which is the reason for Canada’s GST and the EU VAT). The US has not enforced IRS Code 482 on “accounting” that assigns value added to products or services to countries since Reagan killed enforcement, except for the brief period Bill Clinton was running things. We allow the most illogical “price comparison” proof of where value was added, and even then we do not review those files on audit.
Regulation is the reason many private deals are done via partnerships and corporations that are formed in one of our “empty” fly over states.
Canada avoided the mess because of tough rules that did not accommodate innovative financial products, plus a tax system that takes a major part of the living risk out of the individuals hands in return for a lot of tax. The EU was sucked in because they tried to be like their oil companies and motor companies and “international” and try to be US like in lack of regulation The US housing bubble was Bush liar loans to win an election in 2004 – nothing more.
“gravitate to the lowest common denominator” seems to be a force at work – and Obama wants to keep us the “lowest” while formalizing the idea that we are just doing what other countries are doing. Tough regulation is not a corporate goal and thus not an Obama goal.
Meanwhile,
- from “US takes row over EU hedge funds directive to Brussels,” Aug. 30, 2010
Sweden’s “HQ Bank fails
announces involuntary liquidation,” Aug. 30, 2010“US-Europe scandal
mayparalyzes IMF,” Aug. 27, 2010And meanwhile the suffering continues on Main Street:
Record number in government anti-poverty programs
“More than 50 million Americans are on Medicaid, the federal-state program aimed principally at the poor, a survey of state data by USA TODAY shows. That’s up at least 17% since the recession began in December 2007.
. . .
“More than 40 million people get food stamps, an increase of nearly 50% during the economic downturn, according to government data through May. The program has grown steadily for three years.
. . .
“Close to 10 million receive unemployment insurance, nearly four times the number from 2007. Benefits have been extended by Congress eight times beyond the basic 26-week program, enabling the long-term unemployed to get up to 99 weeks of benefits.
. . .
“More than 4.4 million people are on welfare, an 18% increase during the recession. The program has grown slower than others, causing Brookings Institution expert Ron Haskins to question its effectiveness in the recession.”
LINK.
Not saying there won’t be any of LCD gravitation. Just saying that there will be plenty of responsible borrowers who will want to borrow where there is a better chance that their banker will not get into trouble. BRIC comes to mind. Those countries figured out a way to say FU to IMF & WB by piling up reserves & resource countries instated rainy day funds. So why wouldn’t they say FU to overleveraged unregulated U.S. financial corps? Also, many large European corps may wake up this time around. As for the U.S., it is too late.
Did the SEC and CFTC issue a request for comment in the Federal Register as to how to implement the financial reform legislation?
If they did, any member of the public can comment.
If they didn’t, they need to be asked what they are up to. And could they work through the established process for creating regulations.
Basel III is a con. Eurobanks want lower capital requirements because they are more highly geared (leveraged) than American banks. Everybody wants lower standards for Tier 1 capital. As for lending, who’s lending? Most of this is about them covering their asses on their previous investments. It is more extend and pretend. That they want to take weak standards and weaken them further should tell you in what a precarious state world banking remains.
On your two observations:
Harmonization used to be code for U.S. strong arming the rest of the world into the lowest common denominator. I don’t know that we swing that much weight anymore. There is going to be lots of pushback.
That raises a question about what the “lowest common denominator” means. In the context of the framing, it means the least restrictions on leverage (i.e. money creation). But your example indicates that that it might be the least risky instead, which could be tighter reserve requirements, but could also be other factors.
I think you are probably correct. And that is why the negotiations are likely to go nowhere. There are countries and banks for whom extending and pretending is not to their advantage.
Derivative legislation was a joke to start with. The worst and most dangerous derivatives can’t be exchange traded because they are one offs and it is impossible to make a market for them. Fighting it out on the other stuff is a way to distract attention from this and for banks to keep control and a profit center. Almost all the derivative action is concentrated in the Big 5 TBTF, especially JP Morgan. We saw the same thing in the healthcare debate where insurance and Big Pharma didn’t make even small concessions but fought everything out, because, you know, they could.
Yes. Yves Smith in her book Econned points out that in engineering & nature, efficiency, lauded by U.S. economists and deregulation aficionados everywhere, is not the primary issue, redundancy (e.g., backup and other safety systems) is the rule. Those make systems more stable. As we have seen, lack thereof quickly destabilizes the system, which can quickly wipe out any prior gains from ‘efficiency.’
China, Japan, the US, the UK, and Europe are all committed to various kinds of extend and pretend. Of these only Japan looks like it can do it for any considerable length of time. They have afterall been doing it for 20 years.
DING!
Check it:
“Frontrunning: August 30”
“The Linguistic Psychology of Misinformation and Why a Treasury Bond Bubble Unquestionably Exists,” Aug. 30, 2010
“CHINA: Rumors Spread That Central Bank Head Has Defected,” Aug. 30, 2010
Efficiency, now there is a buzzword. Yves also has pointed out that beyond a certain size $50-$100 billion cap, I forget, banks become increasingly inefficient, i.e. they become disconnected from their original markets and customers and start making generic decisions with regard to them which almost always end badly.
“Because the most potentially nuclear forms of derivatives are privately arranged and loosely monitored, two clear goals of the legislation are greater price transparency and the opening of transactions to more market participants.”
EXACTLY! Hedge Hogs. Those suckers are hard to find/catch. Not to mention that it was INTENTIONAL that “hedge” hogs do not have to follow any regulation. Parlay Cards are more transparent and less of a gamble!
Yes, there’s also that. But since the buzzword efficiency may cease to exist at size, that issue is conveniently dropped from the discussion.
As I said, much too late for anything in the U.S. Just looking elsewhere for something that might be a counterforce.
This does not appear consistent with control theory, nor with how nature actually works.
Redundancy is not a rule for stability.
Nature uses multiplicity, each self-governing, individual discrete organisms, not necessarily stable, because nature is focused on survival, not stability.
Individual organisms may become unstable (get sick & die). Groups may die together (lemmings off a cliff). Human use of redundancy is many times very similar to the individual organism, and sometimes is limited by herd behavior.
None of this is about “stability.” Stability is a mirage, because complex system with many non-linear feedback mechanisms are governed by chaos theory.
That is: All systems with non-liner feedback are chaotic (unstable if you will).
Points well taken. So I’ll modify my comment to more stable than efficient systems.
This is called dis-economies of scale.
Let’s use the amoeba model. When amoeba reach a certain size they split (reproduce asexually).
Let’s hypothesize amoeba have tried the let’s get bigger and bigger and don’t split model of growth. What would one call a very large amoeba? Food? Death of the “species”?
There has to be a reason for asexual reproduction, and it’s probably some combination of efficiency, survival, and other limits on scalability of the organism.
Our large organisms don;t split. The Ego’s of the CEOs prevents such behavior.
The Ego’s of the CEOs prevents such behavior.”
LOL – so true
There are golf tournaments for CEO’s that have a given number or more employee’s. One of our operations had overstuffed one area with friends who over time were replaced by strangers – but they were replaced every year – I recommended a severance program for 50 but I found that idea brought us down below 500 ee’s – which was the minimum for an outing the CEO loved. We solved that by my next few years having an assignment added to my corporate duties – find and buy other companies! After he left and the firm sold, the place was rationalize – but for all those years he went to his golf outing with other “important” CEO’s.
Wish that was the way it worked – I have never seen that that in practice.
We always pretend we self regulate – that is why the board has all those committees and chairs other committees run by employees. Voluntarily subjecting the operation to critics who have tough rules so as to have a good image died when better sales meant being an insurance company regulated by NY died – about 1906 with the Equitable scandal as I recall – we buy our critics silence if we can – and we usually can.
Obama is just doing the corporate requested task of making sure there are few rules with any enforcement. LCD makes it all possible.
- from “Coup d’Etat: Standard & Poor’s Is Giving Cover to the Catfood Commission
Now Giving Orders to Congress … and the American People,” Aug. 30, 2010“Quantitative Easing Won’t Help the Economy, But Will Just Create Another Wave of Mergers and Acquisitions,” Aug. 30, 2010
“Jim O’Neill Suggests It May Be Time For The US To Give Up On Our Own Middle Class, And Focus On China’s,” Aug. 29, 2010
- from “Opposition Pay-offs,” Aug. 29, 2010