Global financial regulators have pushed through a series of long-awaited requirements that stipulate how much capital banks must hold to protect against potential losses. The requirements, however, have been variously described as a "quiet victory," something that should be ignored and compared to a "mouse" that should have roared.
Under the "Basel III" rules, banks must hold 4.5 percent of "Tier 1 capital" by 2015 and a total of 7 percent Tier 1 capital after eight years.
Also included in the accords, as Felix Salmon notes, is a countercyclical measure, which requires that banks hold more capital in when the economy is sound. (Salmon dubs Basel III a "quiet victory.")
At the Washington Post, Steven Pearlstein says the agreements are proof that regulators are "getting their spine back." And, despite rules that would seem to still allow Lehman Brothers-style leverage, Pearlstein suggests the financial industry will be far more self-correcting in the future:
I think we can be fairly confident that the regulators no longer believe, as Greenspan once did, that bank executives always know what is in the best interest of their own banks, and that to the degree that they don't, the market can be relied on to discipline them. They have also lost confidence in the sophisticated risk-management systems that never questioned the wisdom of 72-month car loans, or loans to subprime borrowers with undocumented incomes or commercial real estate deals premised on returns lower than riskless Treasury bonds.
Regulators claim that they now see the folly of their over-reliance on market indicators, such as quarterly profits or current asset values, in assessing the financial health of a bank or the quality of its loans. Supervisors have been told to be more forward looking in their analysis and less optimistic in their assumptions about future profits and prices.
But, Martin Wolf, the Financial Times' lead financial columnist, isn't sold on Basel III. Not only are the capital requirements much too small, Wolf argues, but they're actually "far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis."
Worse, he argues, the capital buffers don't end the implicit subsidies provided to the only industry that has "limitless access to the public purse." Here's more from Wolf:
"...the public has an interest in imposing higher equity requirements than any individual bank would, in its own interest, wish to bear. Banks create systemic risk endogenously. That cost must be internalised by the decision makers. More risk-bearing capacity is one way of doing so.
Finally, to the extent that the public wants a specific form of risk-taking subsidised - lending to small and medium-sized enterprise, for example - it should do so directly. To subsidise the banking system as a whole, to persuade it to undertake what is but a small part of its activity, is grotesquely inefficient. "
What do you think? Will Basel III be enough to prevent another crisis?