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The Basel III liquidity plan is the latest case of a global rule hostile to local realities.
January 15 -
Every year that passes, politicians, bankers and even some financial regulators forget how illiquidity helped the 2008 financial crisis spread like wildfire.
January 7 -
Some feel the looser standards will have a positive effect on the economy, while others argue the easing simply represents the latest example of regulators giving banks their way.
January 7
When I heard the news that the Basel Committee, chaired by Stefan Ingves of Sweden, had decided to pull back on the asset-backed requirements for the global banking system, I imagined a phone call the chairman could have received from German Chancellor Angela Merkel: "Stefan, whatever you do, do not cook the goose that lays the golden egg."
That mythical phone call reflects the forces that influenced the BIS banker's Basel III governance committee as they attempted to finalize their recommendations on how many and which type of assets banks must have to loan money to governments, industries and public sectors for projects like bridges, highways and schools. Their decision to both reduce the total amount of reserves (Tier I) required and to relax their previously restricted list of assets eligible towards the requirements has been criticized by many as a cave-in to the banks by regulators.
I do not think that banking regulators anywhere should establish such strict asset and valuation requirements so that the banks, at every level, have little money left to lend. Taking money from the available funds to reserve against "Too Big to Fail” may save the banks, but put the countries and their economies into recession.
The attempt to saddle the eurozone with a Federal Reserve Board type overseer has also met strong resistance, primarily from those who believe that move will not only infringe on national sovereignty (a huge factor in Europe), but also give the Brussels-based European Economic Directorates the power to do things that the Basel Committee has failed to. These proposed new restrictive regulations, echoing the Dodd-Frank Act in the U.S., are seen by many as limiting a nation's ability to find available funds to support plans for economic growth.
The demands for tighter regulation of bank activities and the requirements for backing risks with large reserves date back to the post-Great Depression era and have come alive again with the failures of leading financial institutions from 2007 to 2009.
The debate at executive and legislative branches of the government represents the basic economic policy decisions facing any political unit responsible for governance and its citizenry. In any town, city, state or nation, there is only so much money available through taxes and fees for governments to distribute, without borrowing from the future.
How should such limited assets be allocated? The answer to that question forms economic policy as well as the laws and programs to carry the will of the people forward.
But wait a minute. Don't banks and the private sector also have money? Don't they want to contribute to building a strong economy with a sound safety net for those less fortunate? Then why would our legislators and the regulators they create want to diminish the ability of the banks and the private sector to contribute toward the common good?
Europe has come to grips with the challenge. Most European nations' governance systems are based on stakeholder theory which places the paramount role of government and society on providing a secure social welfare system. Most European governments acknowledge that the result is a diminished ability to attract or support a vibrant free market economy.
As such, many leaders, especially in Germany, recognize that private sector growth is essential to maintaining their current levels of social security programs. Therefore, when analysing the demands for greater security against financial institution failures, they have had to face up to the fact that requiring banks to take money from their loaning capacities lessens the amount of capital available for economic growth.
The coming weeks will present new challenges to government leaders, around the world, as they ponder how to find measures to create new energies in their stalled economies. As there is and always has been a limit on the amount of funds available, leaders will have to make choices between security of the financial system and economic growth.
One of the greatest threats facing the world economies is the extremely high level of uncertainty. Multinational corporations are not going to bring home their billions of dollars to invest in growth and new jobs and small businesses will not risk their enterprise with new investments until we have policies which clarify our national goals pertaining to the allocation of a scarce resource – money – and how it is collected and spent.
How nations regulate their financial institutions and limit their ability to finance healthy economic growth by levying huge fines and requiring high reserve levels will play a critical role.
As for our own regulation versus growth debate here in the U.S., I, for one, wish for a far more effective execution of governance by both executive and legislative branches than we have seen in recent years. Uncertainty about the regulatory future is only one symptom of a significant lack of leadership in defining national purpose, goals and the role of financial institutions in supporting our economic goals.
John Alan James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University in New York City. He is also program director of Pace University's Certified Compliance and Regulatory Professional certificate program.
