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BASEL III: Tightening the Noose on Credit

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If the big banks that brought you the current credit crisis can already meet the new requirements, what exactly does Basel III achieve, beyond shaking down their smaller competitors?

The stock market shot up on September 13, after new banking regulations were announced called Basel III. Wall Street breathed a sigh of relief. The megabanks, propped up by generous taxpayer bailouts, would have no trouble meeting the new capital requirements, which were lower than expected and would not be fully implemented until 2019. Only the local commercial banks, the ones already struggling to meet capital requirements, would be seriously challenged by the new rules. Unfortunately, these are the banks that make most of the loans to local businesses, which do most of the hiring and producing in the real economy. The Basel III capital requirements were ostensibly designed to prevent a repeat of the 2008 banking collapse, but the new rules fail to address its real cause.

Why Basel III Misses the Mark

Two years after the 2008 bailout, the economy continues to struggle with a lack of credit, the hallmark of recessions and depressions. Credit (or debt) is issued by banks and is the source of virtually all money today. When credit is not available, there is insufficient money to buy goods or pay salaries, so workers get laid off and businesses shut down, in a vicious spiral of debt and depression.

We are still trapped in that spiral today, despite massive "quantitative easing" (essentially money-printing) by the Federal Reserve. The money supply has continued to shrink in 2010 at an alarming rate. In an article in The Financial Times titled "US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus," Ambrose Evans-Pritchard quoted Professor Tim Congdon from International Monetary Research, who warned:

"The plunge in M3 [the largest measure of the money supply] has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly."

In a working paper called "Unconventional Monetary Policies: An Appraisal", the Bank for International Settlements concurred with Professor Congdon. The authors said, "The main exogenous [external] constraint on the expansion of credit is minimum capital requirements." ("Capital" means a bank's own assets minus its liabilities, as distinguished from its "reserves," which apply to deposits and can be borrowed from the Federal Reserve or from other banks.)

The Bank for International Settlements (BIS) is "the central bankers' central bank" in Basel, Switzerland; and its Basel Committee on Banking Supervision (BCBS) is responsible for setting capital standards globally. The BIS acknowledges that pressure on banks to meet heightened capital requirements is stagnating economic activity by stagnating credit. Yet in its new banking regulations called Basel III, the BCBS is raising capital requirements. Under the new rules, the mandatory reserve known as Tier 1 capital will be raised from 4 percent to 4.5 percent by 2013 and will reach 6 percent in 2019. Banks will also be required to keep an emergency reserve of 2.5 percent.

Why Is the BCBS Raising Capital Requirements When Existing Requirements Are Already Squeezing Credit?

Concerns about the credit-tightening effects of Basel III were reported in a September 13 Huffington Post article by Greg Keller and Frank Jordans, who wrote:

"Bankers and analysts said new global rules could mean less money available to lend to businesses and consumers. . . .

"European savings banks warned that the new capital requirements could affect their lending by unfairly penalizing small, part-publicly owned institutions.

""We see the danger that German banks' ability to give credit could be significantly curtailed,' said Karl-Heinz Boos, head of the Association of German Public Sector Banks.

"Insisting that French banks were "among those with the greatest capacity to adapt to the new rules,' the country's banking federation nevertheless said they were "a strong constraint that will inevitably weigh on the financing of the economy, especially the volume and cost of credit.'

Juan Jose Toribio, former executive director at the IMF and now dean of IESE Business School in Madrid, said the rules could hamper the fragile recovery.

""These are regulations and burdens on bank results that only make sense in times of monetary and credit expansion,' he said."

For smaller commercial banks and public sector banks (government-owned banks popular in Europe), the credit-constraining effects of Basel III are a serious problem. But larger banks, said Keller and Jordans, "were quick to praise the agreement and insisted they would meet the required reserves in time." The larger banks were not worried, because "The largest U.S. banks are already in compliance with the higher capital standards demanded by Basel III, meaning their customers won't be directly affected." Their customers, of course, are mainly large corporations. "Small businesses that rely on borrowing from community banks," on the other hand, "may be more affected . . . . They will try to make up for the higher capital requirements by lending at higher rates and stiffer terms."

If the big banks that brought you the current credit crisis can already meet the new requirements, what exactly does Basel III achieve, beyond shaking down their smaller competitors? As David Daven remarked in a September 13 article called "Biggest Banks Already Qualify Under Basel III Reforms":

"Indeed, on the day Lehman Brothers collapsed, THEY would have been in compliance with the Basel III standards."

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 
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This article will be followed by part 2, which sug... by Ellen Brown on Saturday, Sep 18, 2010 at 3:33:31 PM
People's big pictures are just off and it is so fa... by Mike Preston on Saturday, Sep 18, 2010 at 9:18:08 PM
Brown's analysis is spot on. The money cartel has ... by R A Bows on Sunday, Sep 19, 2010 at 10:52:22 AM