Basle III needs a rethink but fast

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Published on:

Banks need better regulation, but the terms and conditions set out by Basle III already look woefully out of date.

Jamie Dimon’s reported outburst in Washington against Basle III requirements may have seemed petulant, but he succeeded in making the point that the regulation, which will start to be phased in during 2013, requires more thought.

Dimon’s tirade focused on the unfair advantage that he believes will be created for European banks. Whether his assertions are correct is not particularly interesting for the rest of the world, which is just keen to make sure banks will never again cost the taxpayer money or result in a global financial crisis. But what Dimon has unwittingly highlighted is that no bank is prepared for the swathes of regulation that will soon be upon them.

It has become something of a Catch 22. Regulators were encouraged to think long and hard about the details of new rules after the financial crisis, but their supported dallying has a) had the effect of creating an environment of uncertainty and lack of confidence exacerbating investor jitters and b) taken so long that the global financial environment is now a different animal – and therefore the proposals made at the end of 2009 are no longer sensible.

The most obvious example of this is the proposed Basle III rules around liquidity. The regulation requires that banks have to keep enough cash and ‘easy-to-sell’ assets on their balance sheets to survive a one-month market crisis. Among those ‘easy-to-sell’ assets lie European sovereign debt. Good job the rules have not yet been implemented...

The Basle regulators have now said they will "provide greater market certainty" around the definition of safe assets but it highlights the difficulty of making a defined set of rules within an industry which is clearly still in the midst of a crisis.

Yes, capital requirements should be upped, but if the world is about to head into another, and potentially deeper, recession, do we want to impinge a set of rules that would reduce the amount that could be put back into the economy?

It’s a contentious issue. And what is regarded as ‘a safe asset’ now? Early last decade it was Europe and the US, then it was the emerging economies. Now China’s predicted growth looks uncertain. The game keeps changing and regulators cannot keep up. Their best bet would be to keep the rules loose, and implement them fast so that at least some sense of control is felt while the next few years pan out. But loose rules would be criticized as kowtowing to the banks, and these regulations are supposed to be in the interests of society, not big finance.

There is the growing sense that if someone somewhere, anyone really, could just make a regulatory decision and run with it, some normality to financial markets and economies may resume. At the moment that looks like an impossible feat, and it’s hard to believe that Basle III will begin implementation in 2013. Dimon’s nerves might have to stay on edge a little longer.