Föhrenbergkreis Finanzwirtschaft

Nach den kristallklaren Aussagen des Föhrenbergkreises zur Finanzwirtschaft aus dem Jahr 1999 gibt es jetzt einen neuen Arbeitskreis zum Thema.

This Is Basel III???

Posted by hkarner - 14. September 2010

Yves Smith

Sep 13, 2010 7:39PM

Arriving at the rush, with extra impetus doubtless imparted by the recent and ongoing Eurobanking panic, we have the Basel III capital and liquidity reforms (there’s a one pager, a full press release and, oh, not wholly unexpectedly, a somewhat anticlimactic phase-in timetable). In fact, the liquidity reforms here are just timetable entries – the relatively demanding funding ratio proposals from December last year got shunted into a siding, back in July. 

So, errm, for the moment, what we have are just some capital ratios, actually. Enough to get DB moving: they are raising another EUR10Bn, at the front of the queue. So I suppose the Germans are once again first to put their beach towels on the prime sunbathing spots.If you are terribly enthusiastic about the detail of Basel III bank regulation, I suppose I should add that the other bits and pieces of regulatory apparatus will be the December stuff, plus changes as summarized by Deus Ex Macchiato, or officially, here.

But why be all that enthusiastic about Basel III? It’s still the mixed bag I wrote up here. I see that the end-2012 implementation “with appropriate transition and grandfathering arrangements” now translates to something that won’t be fully elaborated until 2020. All together: quelle surprise!

So what do we think about the capital requirements? Relative to the insane 2% common equity cushion endorsed by Basel II, the new 4.5% requirement, with another 2.5% to be phased in by 2019 (not much sense of urgency there) looks much better. There’s a limit to what any capital requirement could do, of course.

Here are my main gripes:

Valuation: the capital ratios mean nothing if the assets are overvalued. Waldman is always going on about this. It ends up as quite a radical critique: capital ratios without valuation reform = cart before horse.

Accounting: there is still no harmonization of accounting practices on all the shadow banking apparatus: for instance, special purpose vehicles, derivative netting and repos. Actually, of course, when you come across things like Repo 105, or BoA’s quarter end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool probably is an outlier, some of this stuff really, really needs fixing. And do we think that under Basel III there will be more accounting dodges that will cross the line from ‘asset sweating’ to ‘accounting manipulation’?  Not Basel III’s fault, but I rather think we do expect exactly that.

Regulatory risk weightings are still a mess, with the ratings agencies still ensconced as the arbiters of credit quality.

Then of course there is shadow banking, which Basel III largely dances around. One particularly glaring example is the whole custody/client money/asset segregation/rehypothecation/title mess in London. There’s not a peep, burble or whisper here in the UK about the sort of legal reforms (somewhat in the manner of the US’s 1934 Securities Act, perhaps, plus a UK version of SIPC) that would sort this out. Recent Lehman-related rulings on Client Money actually mess the situation up even more. Of course, our obligingly vague 17th century line on “who owns what” works very capital-efficiently for Prime Brokerages. Which is a big part of why Mayfair now houses a $4Trillion shadow banking system. Push from Basel III would have helped get more of a grip.

I have nothing to say about enforcement; it’s been such a long time since I’ve seen any that I’ve forgotten what it is.

In the end, these and other regulatory arbs are all consequences of politics. Pending some unimaginable transformation there, in which regulators somehow acquire the discretion to pick fights with banks, Lex (with apologies for his English usage) tells it how it is :

the reality is that a Basel III world will not look hugely different to  the one from which the last crisis sprang.

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