Tuesday, September 14, 2010

Basel III (Chuckle)

I guess I should say something about the new Basel III regulations.

I will present three “facts” that, I believe, says it all.

These three facts are as follows: 2019; financial markets rose when the news of the agreement was announced; and the agreement was more liberal than feared because a more restrictive agreement was opposed by the German government and the German banks.

First, the new capital requirements do not have to be fully met until 2019. There are some liquidity requirements that must be met by 2015, but this is still five years out.

By 2019, let alone 2015, the world banking structure will be entirely different than it is currently. The world of financial institutions is changing so rapidly due to the advancement of technology and the globalization of finance that over the next five years or so the way finance is conducted will be hardly knowable in today’s terms. I have written many times in the past year about how the United States banks have “gone beyond” the thinking of government legislators and regulators in terms of the creation of the Dodd-Frank financial reform act.

There is no way you can write successful banking regulations that attempt to prevent the recurrence of a past financial crisis. To require something to be done but then give these institutions nine years to conform…is a joke.

Second, financial markets responded positively to the news of the Basel agreements. To me, investors are saying, “Whew! The people writing the Basel rules didn’t do anything really stupid!”

Third, Germany rules the roost. How important is it for a nation to have a strong economy and its finances more under control than the other countries it is dealing with?

Very important! (Are you listening America?)

Especially in a time of economic and financial uncertainty, the player with the strong economy and the stronger financial position holds most of the cards. In order for a community to reach an agreement and have any hopes that the agreement will be implemented, the stronger nation must continue to participate in the community. Thus, concessions must be made.

One can interpret the announcement of the Basel III agreement in this way: the European community is still together but in reaching agreement it is apparent that Germany has the veto power. Germany will continue to have this power going forward until other nations get their economies and their finances in order.

Banks in Europe and in the United States were concerned about what would come out of the recent regulation writing sessions. They, of course, lobbied for less restriction and greater flexibility. The banks did want to have some influence on the outcome. The rules and regulations coming out of the negotiations could have been a lot more inconvenient for the banks.
Still, the large banks will continue on their way. Rules and regulations will always lag behind what the modern commercial bank and commercial banking industry can do, and does. I believe, that banking and finance will change more in the next five years or so than it has in the last thirty. Try and regulate that!

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