Basel: Where Financial Reform Goes to Die

Last Updated Jul 16, 2010 2:32 PM EDT

Now that President Obama can sign financial regulatory reform in Washington, ponder what will happen in Basel, Switzerland, the site of murky, complex and utterly important international negotiations over bank capital rules. The initial signs are that the financial services lobbyists have a shot at hollowing out there what was done here. It is telling that I never managed to write about this for the general interest newspaper that was my former employer. The reason: it's all so opaque and colorless you could not think of a way to make it interesting. (The only colorful thing about Basel is that it's a picturesque city on the Rhine.) Of course, it's incredibly important, so maybe that's why general interest newspapers are having such a hard time of things.

At stake is, bluntly, what capital -- cash -- banks have to keep on hand to guard against sudden losses that could do them in. It's usually divided into Tier 1 and Tier 2, with the former being capital raised through share sales, and the latter more complex debt instruments. If banks had had significantly larger capital buffers before the financial crisis, there would have been no need for government recapitalization throughout much of the western world.

The problem would have been solved before it began. But since banks hate to have money just lying around -- they'd rather leverage it and speculate with it -- they always opposed tougher capital requirements in the treaties known as Basel I and Basel II. (Yes, the new one is Basel III.) If they are not forced to keep more money on hand, then all was in vain.

Bank lobbyists were always best at exploiting the differences between national governments. "Well if you do that, we'll move to London," say the New York bankers. "We'll if you do that," say the Londoners, "we'll move to Zurich." There's always somewhere else. So this WSJ report about the Basel negotiation was particularly disturbing:
The French are demanding changes that would allow their three largest banks -- Societe Generale SA, Credit Agricole SA and BNP Paribas SA -- to continue owning insurance subsidiaries without facing steep penalties. The Germans and French want banks' minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital.

On the testy issue of the leverage ratio -- limiting how much banks can borrow -- negotiators from several countries are looking for wiggle room. Germany, for instance, is worried about the impact on Deutsche Bank AG.
Here's the worst part: if some governments had handled the bank bailouts with a tougher hand, they would not be in this mess. See, Germany, especially, never forced capital down its banks throat the way the United States and France did. So a bunch of their banks are -- though this is often hidden through accounting tricks -- undercapitalized and weighed down with losses. So now they find themselves in Basel with a weaker hand, and needing to dumb down international rules so they don't whack their own banks.

The rest is probably simply lobbying on behalf of national interests, though it's always striking how this is defined. A professor in college once called it "the 'we' fallacy." Fact is, the Treasury Dept. has always seen big U.S. banks as its clients, and tries to please them. We learned yesterday in The Huffington Post that Tim Geithner is opposing the appointment of Elizabeth Warren to head the new consumer financial protection agency, even though she has been the strongest intellectual voice for it. Wall Street is surely delighted, and for more than one reason.

If Geithner is willing, in the sunlight and transparency of Washington, to oppose someone who would keep a sharp eye on the banks, what is he willing to do in the closed rooms of Basel, a city most Americans could not find on a map? Only the bankers know.

UPDATE: It appears there was more going on that simply Geithner heading off Warren's appointment -- we may never know the whole story. In any case, the Treasury is now saying publicly that Warren would be an excellent candidate to head the new agency. That won't save Basel III, though.

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.



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