Since the deal on the Basel accords, I hadn’t seen a whole lot of criticism of the plan, which the consensus opinion finds stronger than expected. But the counterpoints have begun to trickle in. Naked Capitalism has a rundown, though most of the criticisms have little to do with the rules themselves, but what other rules weren’t addressed or whether the regulators will enforce the rules put into place. Of those critiques, the one about valuation (co-signed here) strikes me as the most vital. Without legitimate accounting standards and an end to ridiculously over-valued assets, you can’t really have capital ratios with any full meaning.

Joseph Stiglitz, who also highlights the inadequacy of accounting standards, also takes issue with the actual text of the Basel accords, particularly the long timeframe for implementation:

“While it’s understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk. Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”

Is this delay really a problem? Felix Salmon says no, but in so doing, really calls into question the effectiveness of a capital requirement-heavy reform:

Of course, systemically-important banks are going to have an extra too-big-to-fail capital requirement slapped onto them, over and above the minimum requirements laid out yesterday. So it’s just as well that all of them are currently in compliance with the vision that the BIS technocrats have for smaller banks around the world. (Deutsche Bank might not be there today, but it will be once it’s done raising $12 billion in new capital.)

But the big bonuses that Stiglitz is worried about are overwhelmingly paid out by banks which would be compliant with these new Basel III rules even if they were implemented tomorrow. And once a bank is compliant, the market will punish it severely if it slides back during the phase-in period.

It seems to me that when it comes to the big players in the interbank markets, and any bank with a decent-sized capital markets division, the Basel III standards are de facto in place right now; the only exceptions are banks which have already been nationalized. Or am I missing something here?

If he’s not missing something here, and I don’t believe he is, Felix has both inadvertently highlighted the accounting standards and diminished the argument of those putting all their eggs in the capital requirements basket. Because if the systemically significant banks are all compliant with these new requirements now, yet still taking on major risks in a system not fundamentally altered from the time of the crisis, what has this bought us? Indeed, on the day Lehman Brothers collapsed, THEY would have been in compliance with the Basel III standards.

It was fashionable during the FinReg debate for a certain segment of the progressive commentariat to hail capital requirements and leverage as the Holy Grail. They represented the best chance to prevent another financial crisis, according to this critique. That gets undercut significantly by the current state of the banking sector, still risky yet completely compliant with higher capital ratios. Where the risk has shifted, aside from the shadow banking sector, is into the bigger firms, which have all increased in size since the crisis of 2008, and which remain too big to fail, susceptible to a collapse that would take down the whole system if allowed to go unchecked. All of these things – bank size, resolution authority, proper accounting standards and valuation, fraud prosecutions, and capital requirements – must work in tandem to get us to a safer financial system. These Basel III accords merely comprise a piece of the puzzle, and the biggest banks won’t blink an eye at them, since they already qualify.