Bye, bye, Basel III !

Incredibly, banks’ wishes have come true in the very first week of 2013 ! Should we rejoice ? Well, not really, because one of the main dispositions of Basel III, where prudential norms of the world banking sector are being discussed, has been emptied of its substance.

The crisis of 2008 has shown that solvent banks that are short of cash could go bankrupt. A financial crash can be lethal for a relatively healthy financial institution that is short of cash : Money doesn’t move around, depositors empty their accounts and the bank doesn’t have what it needs to simply keep operating. The idea was to force the banks to have enough to « last » 30 days without any access to the market, and have access to easily movable funds, even in an extreme situation.

The Liquid Coverage Ratio (LCR) was, from the start, to only take into account high quality and very liquid assets like ECB deposits or State Treasury bonds. The banks argued, and rightly so, that Treasury bonds, even the ones from large countries, did not constitute an absolute guarantee.

But, utmostly, all those frozen liquidities « just in case » didn’t please the banks, because it represents a cost to them. So they threatened to restrict credit to businesses, which already are struggling, submerged as they are by all the newly imposed regulations... The result of this threat was that other assets would be accepted as guarantee, namely stock shares and, please don’t laugh, credit-backed mortgage securities. And, to top it all, the date of implementation has been pushed to 2019 ! Needless to say, one of the most needed dispositions of Basel III is dead.

But this attack on the LCR may be revealing something more profound. Because, actually, the banks, along with the regulators and the States in Basel, are probably saying to themselves that, should such a crisis arise, the central banks would open the flood gates of liquidities to avoid a severe cardiac arrest for the banking system (a little akin to the ECB’s LTROs of Dec.’11 and Feb.’12 for a total of one trillion euros). In other words, let’s not worry, let’s be happy, central banks will come to the rescue if things go bad. Also, the ECB wishes to oversee the european banks, therefore it will be very well informed, maybe even before the banks themselves, so why worry ?

Thus, this international prudential regulation notion is failing because of the limitless extension of the power of the central banks. Those are no more simply the « lenders of last resort », but rather the ultimate backstop of the whole financial system. Well, actually, they think that they are... From now on, the banking and monetary systems are more inter-connected than ever, without any prudential norms and, finally, with no other tool than the printing press. By kicking the can down the road with this crisis, we’re setting ourselves for a much bigger one.