Did Regulators Make the Right Call on Basel III?
Every year that passes, politicians, bankers and even some financial regulators forget how illiquidity helped the 2008 financial crisis spread like wildfire.
Global central bank chiefs gave lenders four more years to meet international liquidity requirements and watered down the measures in a bid to stave off another credit crunch.
Over the weekend, global regulators elected to loosen key components of the Basel III liquidity rules.
Specifically, they relaxed the "liquidity coverage ratio," allowing banks to use less-traditional assets, including equities and high-rated mortgage-backed securities, to satisfy up to 15% of their requirements. They also delayed the revised rule’s full implementation to 2019.
Most news outlets were quick to classify the final rule as a big win for bankers, who have spent much of the last two years arguing that Basel III requirements were, among other things, too complex and virtually impossible for a majority of financial institutions (community banks, specifically) to maintain.
Some pundits suggested that the easing could have a positive influence on both markets and the lending community.
“The revisions … should make the liquidity requirement less likely to deter financing of activity in the real economy,” according to the FT’s Lex column. “And they should sustain the buoyant demand for corporate bonds, and kick-start the securitization market.”
Others have argued that less stringent rules will do very little to bolster lending or, moreover, that any potential positive influence on the economy would be negated by the deeper implications the decision carries.
“The entire financial system is rendered riskier when all of the largest institutions are cajoled by regulators into adopting a similar view of asset risk,” CNBC senior editor John Carney wrote in a blog post.
“With every part of Basel III that is gutted, we are increasingly back where we were at the eve of the crisis,” Mayra Rodríguez Valladares, a managing principal at MRV Associates, wrote in a BankThink post earlier today. “In today's financial world, regulators pretend to supervise while banks pretend to be liquid.”
These sentiments, as alluded to in today’s Morning Scan, were shared by some members of the general public, who felt the easing was yet another example of regulators simply giving the big bad banks their way.
“The self-serving deregulation … is nothing more than history already repeating itself and we’re not out of the mess from the last go round,” one Wall Street Journal reader commented. “No more ‘too big to fail’ ….that’s just semantics. They built it right back in.”
However, on the opposite side of the spectrum, there are those who think believe regulators have not adequately quelled the threat Basel III poses to community banks.
“Dangers still lurk in [Basel’s] implementation in the years to come,” writes John Berlau of the Competitive Enterprise Institute. “This is both because of the accord’s wrongheaded bias in favor of sovereign debt, and because U.S. regulators have rushed headlong to push it through before congressional action that is almost certainly needed to ratify any complex international agreement of this size.”
What’s your take on the recent changes to Basel III? Do the looser requirements adequately address the problems earlier versions were believed to pose for community banks? Or does the easing have deeper implications? Let us know in the comments section below.
Correction: John Berlau is with the Competitive Enterprise Intstitute. An earlier version of this post incorrectly associated Berlau with the Bastiat Institute.