In a nutshell, the answer to this question is “Not really.” It appears that the prolonged phase-in of the new international capital and liquidity rules, implemented by the Basel Committee on Banking Supervision, will only further muddle the already muddled banks’ future financial stability and security. In the aftermath of the crash of 2008, the U.S. demanded tougher rules as quickly as possible, while Germany stubbornly pushed back. Further complicating things were the Brits, Swiss, Japanese and French, who joined the melee having mixed feelings and very little to say that was constructive.
I don’t think that international regulation has ever attracted so much attention as did the struggle to piece together new rules of engagement for the global banking industry that has just wobbled its way out of the wreckage of 2008. Granted, the idea was a noble one; wanting to create rules that would prevent something like the crash of 2008 from happening ever again. Yet, what came out of Basel on September 12 appears to have missed the target by quite a margin.
The new capital and liquidity rules may have seemed difficult for most banks to meet; however, most banks ended up having eight years to comply with them, and some as many as 13 years. Within that timeframe, anything can happen, including one or two or three more crises. The way it looks to most economists, the opportunity to straighten the global banking sector has come and gone.
Sure, there was lot of pulling and tugging. Where the Basel Committee on Banking Supervision showed some backbone was on the banks’ minimum capital requirements, tripling those minimums in the form of equity and preferred shares. Where the Committee lost the game — and it is a crucial point — was in the implementation period. The banks have managed to secure this eight- to 13-year-long phase-in period, offering one strong argument: If you put too much pressure on us to build this huge cushion in too short a time, we won’t be able to lend. If we cannot lend, we cannot jumpstart the global economy. If we cannot jumpstart the economy, we’ll be back in a credit-induced recession in no time.
This was not just a potential scenario. It has actually already happened, which is why the Basel Committee couldn’t ignore the banks’ outcry. In 1988, the Basel Committee gave banks four years to get in line with the world’s first global capital standards. The banks couldn’t do it without reduced lending, which was the direct cause of the credit crunch of the early 1990s and the ensuing recession. This time around, obviously such a highly probable mistake could not have been repeated and the Basel Committee had to admit that consequences could be dire to the already fragile global
How could have Basel helped turn around the global banking industry? Well, one place to start could have been limiting spending on executive compensation and dividends until the new capital requirements are met. Another means could have been higher capital ratios and shorter implementation of the new liquidity coverage ratio, the lack of which, for example, has finished off Lehman Brothers and Bear Stearns and ushered in the Great Recession. Incidentally, banks have put up the least fight on this liquidity coverage ratio. Still, the regulators have opted to give it a longer implementation period, hoping to avoid any unforeseen consequences. Like what? The next financial crisis?