Banks Four, Basel III

06/25/2010 3:36 pm EST


Jim Jubak

Founder and Editor,

The lesson is clear: Never, never underestimate the ability of banks to beat back the regulators when it really counts.

You might have thought that the international regulators in charge of formulating a new set of rules called Basel III would have had the upper hand after the global financial crisis. You might have thought that putting rules in place to require banks to increase the liquid funds they hold so that they’d don’t go belly up in a crisis would be an easy win for the regulators.

You would have been wrong.

On June 24, the regulators writing the Basel III rules agreed to pare back requirements for higher liquidity. Instead of a concrete proposal that would have required banks to keep a stable net funding ratio that aligned the maturity of assets and liabilities (and which would have required banks to be more liquid if they owned assets with longer maturities), the Basel III regulators will propose a much more vague system of “oversight” when they present their plans to the G20 economic meeting over the weekend.

If this sounds like the kind of lobbying victory that I’ve described in the efforts by US banks to head off any really damaging aspects of financial reform in the US Congress, you’re exactly right, it does. Vaguely written rules are always better than clearly described mandates and formulas. (For more on the battle over financial reform in Congress, see today’s edition of Jubak’s Journal.)

Banks had argued that an increase in the liquid funds that they would have to keep on hand to balance any lending or purchases of debt would raise borrowing costs for consumers. With governments around the developed world worried about their economies sliding back toward recession, that turned out to be a very powerful argument. Banking executives didn’t stint when they threw around their estimates of the cost of the Basel III rules. Projections ranged as high as $6 trillion in extra costs that would have had to be passed on to borrowers.

For the same reason that you should take those estimates with a grain of salt (or two or three), you should be skeptical of Wall Street estimates of how much the Basel III rules would have hurt bank profits. At their most extreme, estimates said that the Basel III rules, as originally proposed, plus proposed taxes on banks, would have cut the return on equity at a typical bank to just 5% from 20%.

Banks don’t need to worry about an outcome anywhere near that draconian. Of course, it’s not clear that they ever really did. (For some new bank stocks to watch, see Jim’s Watch List.)

Full disclosure: I don’t own shares of any company mentioned in this post.

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