Pethokoukis

Global bank regulators go for growth over safety, keep fingers crossed

This whole deal has the stink of fear all over it. Fear about the health of the global economy and fear about the health of the post-Financial Crisis banking system. Reuters:

The Basel Committee agreed on Sunday to give banks four more years to build up cash buffers against future shocks like the 2008/09 financial crisis, and to widen the range of assets they can use to include shares and residential mortgage-backed securities, as well as lower-rated company bonds.

This pull-back from an earlier draft of global liquidity rules, which aim to help prevent another banking crisis, means lenders will in theory have more scope to use some of their reserves to help struggling economies grow.

1. I understand the logic in wanting to break the sovereign debt loop — banks get in trouble by holding too many bonds of their cash-strapped governments, government borrows to bail them out, sovereign prices fall further, banks gets in more trouble — but doesn’t this lessen one possible check on government borrowing?

2. No surprise that Ben Bernanke was reportedly in favor of this. The earlier version would seem to work against the Fed’s effort to boost growth and the housing market by lowering mortgage rates. As WRG’s Jaret Seiberg notes. “We have argued for two years that regulators would never implement the Liquidity Coverage Ratio as proposed because it would curtail lending, cause banks to dump mortgage-backed securities, and force them to dominate the Treasury market.”

3. I also wonder if this wasn’t a case of the Basel committee carefully picking its fights and reserving some powder for when it introduces new limits on banks’ reliance on short-term funding.

4. I love this bit from the WSJ’s analysis:

Nobody knows for sure whether the rules will strike the right balance between preventing banks from becoming dangerously fragile and providing the industry the flexibility needed to finance economies around the world. Previous iterations of the Basel rules failed to prevent banking crises, partly because they didn’t anticipate the then-obscure corners of the financial system that would cause future problems.

Indeed.

One thought on “Global bank regulators go for growth over safety, keep fingers crossed

  1. From what I saw in the regulatory blogs I follow, this was indeed a wise compromise at the right time.

    “1. I understand the logic in wanting to break the sovereign debt loop — banks get in trouble by holding too many bonds of their cash-strapped governments, government borrows to bail them out, sovereign prices fall further, banks gets in more trouble — but doesn’t this lessen one possible check on government borrowing?”

    No, and I don’t see how you come that conclusion.

    In addition, one has to compare the risks of MBS’s compared to some sovereign’s like Greece’s.

    I’ll take the MBS,’ thanks. The flexibility shown here was wise judgment. Well done.

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