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.