Leading article: The triumph of the lobbyists

Share
Related Topics

International co-operation on banking reform is axiomatically desirable. We live in an era of massive global capital flows and sophisticated cross-border banking. A firm like HSBC takes deposits from ordinary savers in Hong Kong but is regulated in London. Goldman Sachs collects money from clients in Europe and invests it in China. In a world of globalised finance, it makes sense for national regulators to work together.

But an international approach is only really worthwhile if it is effective. And, sadly, the latest efforts of the Swiss-based Basel Committee on Banking Supervision, the closest institution we have to a global banking governor, simply do not come up to scratch.

The new capital adequacy rules unveiled by the committee yesterday, known as Basel III (after two other ill-fated incarnations), will require all banks to hold "common equity" of at least 7 per cent of their assets. This is considerably more than the 2 per cent core capital requirement under Basel II. But the new minimum is still less than the 11 per cent capital that Lehman Brothers was reporting right up until the Wall Street firm went bust two years ago. Some grossly undercapitalised European banks in Spain and Germany will have to raise more equity under Basel III. But they will have a generous six years to comply. And US and UK banks have already more or less reached the required capital ratios. Most banks will have surveyed what the Basel Committee produced yesterday and concluded that it was the green light for business as usual.

So how did it come to this? How, with the greatest banking meltdown since the Great Depression still fresh in the memory, did we get such weak reform? A big part of the answer is that the Basel forum itself is discredited. At Basel, central bankers and regulators effectively haggle with the representatives of the very industry they are supposed to be overseeing. And the banks lobbied very effectively indeed. Citing dubious statistics which purportedly showed that tough new capital rules would hold back the economic recovery, they succeeded in getting the requirements watered down to near uselessness.

The financial lobby also skilfully exploited the divisions between national governments over the level of capital needed by banks. Germany and some other EU governments are still in denial about how short of capital some of their own lenders are and fought efforts of the US and the UK to push for higher ratios. While national governments were divided, the banking lobby was impressively united.

This regulatory weakness is one of the reasons why it is so hard to take this reform seriously. There is scope under Basel III for regulators to force banks to raise their capital to 9.5 per cent of assets when the next credit boom begins. But all the evidence suggests that the banks will steamroller the regulators if they attempt to exercise these powers.

Similar scepticism ought to attend the new powers of regulators to force banks to cease paying bonuses and dividends if their capital dips below 7 per cent. We have seen the limits of the ability of politicians and regulators to force bankers to exercise restraint over remuneration all too clearly in recent years. There is no reason to believe that they will take a more robust stance in future.

Two types of reform were made necessary after the global financial meltdown. First, bankers needed to be forced to increase their capital safety buffers to (at least) a fifth of their assets. Second, there needed to be fundamental structural reform to end the "too big/inter-connected to fail" problem. On the first front, regulators have delivered far too little. On the second, political leaders appear to be in the process of surrendering to the vested interests of the banking world. It is hard to avoid the conclusion that, on the eve of the second anniversary of the Lehman Brothers meltdown, the lessons of the banking crisis have gone unlearned.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Maths Teacher

£110 - £200 per day: Randstad Education Leeds: Secondary Maths Teacher for spe...

Maths Teacher

£90 - £160 per day: Randstad Education Leeds: Secondary Science Teacher (mater...

Maths Teacher

£110 - £200 per day: Randstad Education Leeds: Secondary Maths Teacher for an ...

Maths Teacher

£22000 - £37000 per annum: Randstad Education Leeds: A West Yorkshire School i...

Day In a Page

Read Next
 

i Editor's Letter: The campaigning is over. So now we wait...

Oliver Duff Oliver Duff
In this handout provided by NASA from the the Earth-orbiting International Space Station, weather system Arthur travels up the east coast of the United States in the Atlantic Ocean near Florida in space. The robotic arm of the Space Station Remote Manipulator System or Canadarm2 is seen at upper right. According to reports, Arthur has begun moving steadily northward at around 5 kt. and the tropical storm is expected to strike the North Carolina Outer Banks  

Thanks to government investment, commercial space travel is becoming a reality

Richard Branson
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week