Tuesday, June 21, 2011

Basel Is Political

. Tuesday, June 21, 2011

Wonky technical point with large ramifications:

This year has seen some improvement. Data submitted by banks in May were subject to “peer review” by a committee of experts from the European Banking Authority (EBA), a pan-European college of regulators, which is administering the tests. The committee concluded that some banks had been over-optimistic in their self-assessment. In some cases different banks had estimated very different probabilities of default and losses on similar underlying assets. Results were meant to be out this month, but all banks have now been asked to do their sums again and resubmit by the end of July.

National regulators have not taken kindly to this. Germany’s regulator, BaFin, has been involved in a public war of words with the EBA over its definition of capital. The EBA has adopted the Basel III standard for Tier 1 capital. That excludes “silent capital”, bond-like instruments which Germany used to recapitalise its banks. Germany has pointed out that banks have several years to be Basel-III compliant. But so far the EBA has resisted German demands to recognise silent capital.

Why is this provision in Basel? Because US and UK banks don't use silent capital to pad their ratios, so if US/UK regulators were going to up the statutory capital requirements for their banks, they wanted to make sure those banks weren't competing against firms (esp in Germany and Japan) that were gaming the system, and gaining a competitive advantage from it. Basel III looks the way it does for a reason, and that reason isn't simply technocratic.


Basel Is Political




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