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Bank regulation to prevent another crash recedes into the distance

Quietly, with no fanfare and no headlines, the banks are steadily chipping away at the measures, meagre and delayed as they already are, designed to prevent another global financial crash. First, the capital adequacy ratios – the financial reserves that have be held to prevent or absorb any run on the bank that might develop – have been drastically weakened as a result of bank lobbying behind the scenes.

At the time of the great crash of 2008-9 the level of tier 1 capital that had to be held in relation to a bank’s total risk-weighted credit exposures stood at 2.5%, which is fatally low. The new Basel III level set by international regulators in 2011 (revised slightly in June 2012)was still only 4%, well short of the 7% or even 10% demanded by reformers. Thus it took 4 years after the crash for even the slightest (and inadequate) tightening of the rules. However, worse was to follow.

The pusillanimity of the new capital reserve requirements was accompanied by almost unbelievable procrastination. It was decided that the new rules would not apply till 2019, as though the risk of a fresh crash could attend upon the convenience of the bankers. As if this was not bad enough, Osborne, desperate to get the banks lending to industry to re-start growth, conceded to the banks that the ratio would be reduced from 4% to 3%, thus reopening the very real risk of another disastrous run on a weak bank.

The banks, true to form, responded to this inordinate and dangerous concession by increasing their lending to industry virtually not at all. To cap it all, the capital adequacy ratio isn’t anyway fit for purpose by itself since under the Basel reform proposals it wasn’t combined with a leverage ratio which (unlike capital adequacy formulae) really would predict the probability that a bank would fail.

Last month the rules were weakened further. The so-called liquidity coverage ratio – the second arm of the Basel III reforms requiring banks to hold enough cash and easy-to-sell assets to enable them to survive a short-term crisis – was softened by allowing them to hold a wider (and easier) variety of liquid assets towards their buffers and also by changing the calculation methods in ways that significantly reduce the liquidity buffers that have to held.

Now even the ring-fencing itself between the retail and investment arms of banks, as proposed by the Tory-commissioned Vickers report, is being seriously threatened. This UK report, which is still be implemented nearly 6 years after the crash, was reinforced by very similar recommendations of the EU Liikanen report last October. However, it’s not as though ring-fencing is anyway an adequate solution.

Ring-fences (as opposed to a clean statutory break) are just too porous that can end up more like a string vest, a loophole which can easily be turned by City tricksters into a bolt-hole. Nevertheless that still hasn’t stopped the bankers demanding that ring-fencing is a step too far and should be quietly abandoned. Are the regulators and politicians utterly spineless?


  1. Jon Williams says:

    Why do we have to wait until 2019 for the Vickers Report to be implemented? Can anybody explain why it can’t be done now?

  2. Robert says:

    They are trying to find reasons not to bring it in, so by 2019 things might become better and none of us will care or so they hope

  3. Syzygy says:

    The belief of the World Economic Forum, neoclassical economists (like Mankwi who Ed Balls studied with) and standard student textbooks is that ‘fraud is extremely rare’. The ‘markets’ are assumed to be self-regulating and self-cleansing. Hence, there does not need to be regulations or supervision which might interfere with the ‘wisdom of the market’. Delay and minimising of any regulation is therefore ‘desirable’.

    Yep.. its completely bonkers! The daily spate of scandals from Libor-rigging to money laundering largely originate in the City of London which, according to Bill Black, is the no.1 most criminogenic environment.

    There is always an issue about which politicians genuinely believe the neoclassical economic mythologies, and which ones are aware that this is a convenient cover for redistributing wealth upward and offshore. This is what James K Galbraith means when he writes about ‘the predator state’, the monopoly collector of taxes to redistribute to the corporate and financial sectors.

  4. Robert says:

    sadly New labour in which Blair and Brown ran the club actually took away some of the safe guards within banking in the hope that banks would make more money more tax for more spending.

    Sadly the Tories are a group of people who would love the banks to do the same, but cannot yet say go for it because we have no idea what is going to come up next, I’m sure we will see more bail outs yet.

  5. Syzygy says:

    I agree Robert. I think Brown, as the son of the manse, was authentic in believing what the neoclassical economists told him ie. markets self-correct, banks and aggregated debt don’t matter .. but essentially, he allowed the crooks to pull a heist and recompensed them for their crimes because they were ‘too big to fail’.

    The rather desperate intention was to put the system back together again and let the ‘good times’ roll once more. However, there was systemic failure and the system needs to be radically changed.

    Why on earth didn’t they properly nationalise the failing banks? Why does the LP still cling to the ‘UK running out of money’ mantra? We’re the 7th largest global economy with food banks and increasing numbers of suicides resulting from welfare ‘reforms’.

    The current concern is the highest levels for the Dow and FTSE since the crash.. this looks like another financially rewarding bubble for the 0.14%. The media reports about the EU and the markets beginning to stabilise look like more fantasy politics… and as you say more bail-outs.

  6. Dave says:

    Syzygy: “Why does the LP still cling to the ‘UK running out of money’ mantra?”

    Surely it must be because Labour favours a policy of austerity. Alistair Darling, had Labour won in 2010, promised cuts more savage than those implemented by Thatcher.

    Such a course of action can only be justified by claiming, as Liam Byrne famously did, that there’s no money left.

    Of course, many distinguished economists such as Krugman, Portes etc. disagree with the Labour (and Tory) policy but the people who got us into this mess think they know better.

  7. Robert says:

    But of course Thatcher did not cut everything for example she gave the disabled and the sick DLA, she also gave us IB, which raised my living standard to new highs and gave me a car.

    It was Labour that has tried to remove that from us, sadly the Tories and labour are basically running down the same lines these days.

    I suspect we would not find to much difference between the parties, both are out to change society

  8. Dave says:

    ” not find to much difference between the parties”

    Both parties appear to be set on a course informed by ideology rather than reason.

    When Professor Allyson Pollock (and others) destroyed the case for PFI and marketisation in a series of articles published in the British Medical Journal she was quickly replaced as special adviser to the Commons Health Committee by a market friendly academic.

    The Labour government then abused parliamentary privilege in an attempt to discredit Pollock.

    Fortunately, as a person of integrity, Allyson Pollock faced down the intimidation. She went on to publish the details, and much more, in the powerful analysis contained in the book: NHS plc

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