February 1st, 2013
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?