Basel III: "Ein überhastetes, nicht zufriedenstellendes Regelwerk"

Simon Johnson schreibt über Basel III:

Unfortunately, the structured intergovernmental process that actually changes the rules around banks – known as Basel III (or “Basel 3”) – was rushed to an unsatisfactory conclusion last weekend. The US and other countries with major financial centers will need to add substantial additional capital requirements at national levels if these new rules are to be at all effective.

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The key conceptual breakdown is this: While pushing back against the banks’ claims that higher capital requirements would be harmful, the officials have still allowed the banks to frame the discussion – implicitly conceding that moving to higher requirements quickly could reduce lending and damage growth.

But again the best thinking from independent analysts demonstrates that this view is completely at odds with the reality. David Scharfstein and Jeremy Stein, summarizing experience on this issue, point out that there is a world of difference between requiring banks to reach a certain capital-asset ratio (which they are likely to do by shrinking assets, i.e., making fewer loans among other things) and requiring them to raise specific dollar amounts of capital.

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Banks do not like to raise capital; they will generally only do it when forced. The fair way to do this is through tough and transparent stress tests; these should be repeated in the US and on a comparable basis in other financial center countries every year. Agreeing to move in this direction should be a major goal of the G20, but alas it is currently nowhere near being on the agenda.

The Hanson-Kashyap-Stein view, which is completely mainstream financial economics (not any kind of radical or political view) is that banks should be required to hold enough capital at the peak of the cycle so that when they suffer losses (and, 2007-2010, US banks lost about 7 percent of their “risk-weighted” assets, which is the denominator here), they still have enough capital so that the markets do not think they will fail – and therefore there is no need to dump assets in a desperate bid to survive. (It’s the forced asset sales of this nature that turn financial distress at particular institutions into broader asset price declines and that can trigger panics.)

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And systemically important financial institutions, for which the Basel process appears to have completely dropped the ball, should be subject to even higher requirements.