What Happens in Basel Doesn’t Stay in Basel
Kevin Drum’s been trying to get us to pay more attention to the ongoing Basel III negotiations where a lot of the regulatory details for the financial system are being worked out in practice. Nobody much is paying attention to this, because there are about a million times more reporters in Washington DC than there are in Basel. But the Wall Street Journal has a good account which highlights that the main problem isn’t so much politicians who are too in hock to “the banks” or “Wall Street” as it is that politicians are too in hock to specific national champions:
National interests are a big factor as well. The French are demanding changes that would allow their three largest banks—Societe Generale SA, Credit Agricole SA and BNP Paribas SA— to continue owning insurance subsidiaries without facing steep penalties. The Germans and French want banks’ minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital.
On the testy issue of the leverage ratio—limiting how much banks can borrow—negotiators from several countries are looking for wiggle room. Germany, for instance, is worried about the impact on Deutsche Bank AG. They want regulators to be given discretion over how rigidly to enforce the new ratio, rather than having binding global rules. Other officials counter that that would undermine the intent of the rule. In a temporary fix, officials have said they would begin with an “observation period” for the leverage ratio, and there is now a major disagreement over what to do after that.
This is the kind of dynamic that teeters on the brink between success and catastrophe. If you take every industrialized country, and then each industrialized country’s government looks at one or two or three large institutions and picks out a rule it wants softened for the benefit of one of those firms, and then everyone comes to the table and demands a loophole, then you wind up with swiss cheese. Alternatively, the pile of loopholes can get so enormous that regulators realize that the best way to avoid disadvantaging any particular national champion is just to write some decent rules rather than engaging in competitive loophole-seeking behavior.
Unfortunately, it’s difficult to get good outcomes in this field unless the broader public is paying attention to what’s happening. And it seems unlikely that Basel III is going to be dominating headlines in mass media outlets around the world.