Friday, June 3, 2011

Basel Politics Nothing New

. Friday, June 3, 2011

Felix Salmon:

One of the big successes of the Basel III process was that while there were serious disagreements along the way, the governments and central banks concerned were pretty good at keeping the discussions productive and confidential. But just as with Dodd-Frank, it seems, the real difficulty is going to be in implementation, and that’s where there’s a big risk of everything becoming very political.

In the short term, the biggest winners in any fight between regulatory authorities are always going to be the banks, who will happily arbitrage differing regional regulatory regimes and take advantage of their parents’ squabbles to stay out drinking all night. In the long term, however, even the banks would ultimately prefer a single global regulatory regime with clear ground rules and a level playing field — something which lets them concentrate on their main job, of banking, rather than expending enormous effort on lobbying and loopholes.

A few relatively minor quibbles:

1. I would stress that it makes little sense to frame this in terms of "big risk of everything becoming very political". Everything has already been political. The entire Basel negotiation process was political (see also here, here, and here). The time schedule for implementation was political. The terms of implementation (and definitions of implementation) remain political. The political nature of every step in the Basel process is not only in line with the Basel III history, but with previous Basel accords as well, as a paper (no math) Thomas and I co-wrote argues.

2. Saying that banks would prefer a level playing field neglects the very important point that not all level playing fields are the same. Banks in some countries would prefer one type of field, while banks in others would prefer a different field altogether. The battle is not over whether or not there should be a common set of broad standards; it's over what those standards will be. And on this point, not all banks have homogenous preferences. Large, well-established banks would prefer stricter regulations (in some areas at least), as those are likely to reinforce their market position and create barriers to entry. This is why this is a political battle.

3. This is not just an EU v. US battle. The EU is split along some important lines, as one of the FT articles Salmon links hints:

Mr Barnier’s comments were triggered by a Financial Times story based on an unpublished draft of the impending EU legislation, which indicated that there would be more flexibility for banks with insurance subsidiaries than proposed under the Basel III guidelines.

As with the debt crisis, what is good for German banks (say) might not be good for other EU banks. The UK butted heads with other EU members repeatedly during the Basel negotiations.

All to say, the political nature of Basel III has been present all along.


Basel Politics Nothing New
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