As the latest incarnation of the Basel Accord, does Basel III really provide the most financially sensible way to provide protection against a repeat of the 2008 global credit crisis?
By: Ringo Bones
Born out of the governments in the industrialized West experiencing first-hand the shock of the global credit crunch, the latest incarnation of the Basel Accord – the Base III Agreement – was seen as a saviour of governments now weary of using taxpayers’ money to prop-up ailing banks. This “New Deal” for central bankers aims to reduce risks of future financial crisis through proposed Core Tier I Capital requirement reforms – in other words increasing the banks capital reserve. But is this a sensible solution against a future financial crisis?
As it was the Bank of International Settlements being one of the first to warn against the looming 2008 global credit crunch months before it actually happened, the Basel III Agreement was readily agreed with open arms (or was it via political clout?) by central bankers and senior regulators. With required aims to triple the size of banks’ capital reserve in comparison to previous Basel Accords in order to protect against another banking crisis, plus the proviso of cutting bonuses of bank executives if they can’t maintain the newly agreed capital ratio. With such stringent capital requirements, one could wonder if Basel III will ever have universal appeal.
As of late, bankers have warned a regional regulation race that could result once Basel III is finally implemented. Not only that, the stringent capital requirements also means less money available for banks to be made available to be borrowed, thus lowering their “potential” earnings - which could eventually hurt fledgling small to medium business firms seeking to borrow funds for capital expansion. Although the new rules are yet to be submitted to the upcoming G-20 meeting in South Korea, it is very doubtful if there is another bankruptcy protection scheme that can provide a better compromise between a bank’s profit earning potential and the risk of a worst-case scenario where a large number of borrowers default on their debts. Like what happened during the subprime mortgage crisis of 2008.
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4 comments:
Banks need more equity capital to prevent another subprime mortgage crisis / credit crunch from occurring again - especially when most investment banking and other financial industry institutions are continuing to operate without any existing risk management system whatsoever. Worse still, these financial institutions are even leverage 30 times or more for every dollar they currently have at any given moment.
Basel III will instigate an unintended consequence / ripple-effect of slowing down trade in financial instruments and slash down on capital to be offered for lending by banks for business start-ups and expansion. Basel III would make banks tighten their monetary policy yet another notch since the September 15, 2008 collapse of the Lehman Brothers.
Excessive executive bonuses are the main threat to banks and other financial institutions in the U.S. and the E.U. And its questionable whether the raison d'être of Basel III can protect these banks' obsession with handing out excessive executive bonuses.
IMF managing director Dominique Strauss-Kahn recently said in an interview about banking regulation says that BASEL III type regulations are just a start - what banks urgently need to avoid a repeat of the 2008 global subprime credit crisis is proper banking supervision.
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