Bailout

Basel III: The compromise

By Felix Salmon

Maybe 9% was too good to be true after all. According to David Walker, of Australia’s Banking Day, a compromise with “nations including Germany, France, Italy and Japan” has knocked 0.5% off the proposed Tier 1 capital requirements, and another 0.5% off the proposed conservation buffer. As a result, banks wanting to pay dividends are now going to have to have a minimum of 8% Tier 1 capital, rather than 9%.

If* the new ratios are strictly enforced once they become fully phased in, this is still a big improvement over what we had before, and a win for the community of global bank regulators. Still, we’re not there yet: final agreement won’t come until the G20 meets in Seoul in November. Fingers crossed nothing else will get diluted between now and then.

*This of course is a big if, and Kindred Winecoff, for one, thinks that it’s hopeless to even dream that it might become reality:

Politicians won’t give up their domestic authority or ability to address changing local circumstances, so agreements made in Basel are subject to interpretation, implementation, and enforcement by domestic regulators. The U.S. still hasn’t come into full compliance with Basel II, for example, and there is essentially no recourse for other nations or the BIS to force it to do so.

There’s certainly a coordination problem here: countries have every incentive to drag their feet and watch the rest of the world tighten up, leaving their own banks at a global competitive advantage. But having clear rules and a coordination problem is a vast improvement over having no clear rules at all. And if the G20 can agree to do this in November, I have some hope that they can also commit to hold each others’ feet to the fire going forwards, if one of them starts backsliding.

Full post as published by Macroprudential on September 09, 2010 (boomark / email).