Reply #16: On the Gutting of Financial Services Reform

[Pale Blue Dot]

Bloomberg has a well done but disheartening account of the watering-down-to-meaninglessness of financial services industry reform, with the case example being Basel III. Basel III is the latest iteration of capital standards for banks, which is hoped to be implemented more or less true to form by various national bank regulators. Richard Smith has been ably covering the substance of this beat (see here and here for earlier posts) and the details are indeed more that a bit convoluted.

However, Basel III has been touted in the US as the fix for the shortcomings in bank reforms such as Dodd Frank. As Treasury argues, if banks have more than enough capital, you have a lot of room for error on other fronts. But Basel III preserves too many bad ideas of its predecessor, Basel II, such as risk-weightings for various types of assets that lend themselves to gaming; along with risk weighting, a preservation of the problematic role of unreformed rating agencies; allowing big banks to use their own idiosyncratic and often widely varying risk metrics; an obsession with the asset side of the balance sheet, and not enough to the way that liabilities can also blow out when asset prices are under stress. Basel III thus preserves the architecture of Basel II. Andrew Haldane of the Bank of England described how regulation could best contend with a world of uncertainty, meaning risks that cannot be measured.

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Now a set of rules this elaborate and complex is also a ripe target for lobbying, particularly when it is a new iteration of a largely familiar system. The incumbents know well what the various choke points and how they might obtain relief from them. They may also have a keener appreciation than their minders of how the whole can be greater than the sum of the parts, how a combination of seemingly minor tweaks can give them a tremendous amount of latitude.

But that view presupposes that regulators had their hearts in coming down hard on the banks. It’s remarkable how, despite continuing high unemployment and yawning government deficits in virtually all major economies, that the meltdown of 2008 is regarded as an artifact of the distant past, apparently of sufficiently little consequence as to merit tough action now. The Bloomberg piece describes, admittedly at a high level, how Basel III was watered down. It’s told from the vantage of the battles Shiela Bair lost; query what other skirmishes were therefore overlooked.

http://www.nakedcapitalism.com/2010/12/on-the-gutting-of-financial-services-reform.html