Global banking rules make no sense at all to me.
Each CB need only mind the banks its insures.

But until that’s understood we have to suffer through this nonsense.

“This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said at a briefing following yesterday’s meeting. King chairs the Group of Governors and Heads of Supervision, or GHOS, which decides on global bank rules. “For the first time in regulatory history we have a truly global minimum standard for bank liquidity.”

Banks and top officials such as European Central Bank President Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households.

“The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”

16 Responses

  1. “ability of the global banking system to finance a global recovery”

    What an astounding statement! These people sound like they think fiat currency systems are privately owned!

    Is Merv confusing the BoE with Ye Olde British East India Corp?

    1. @roger erickson,

      The point here is that regulators set capital and liquidity minimums which can impact a bank’s ability to lend. If they are to strenuous bank lending could be curtailed which may have negative implications for aggregate demand. In a typical recovery bank lending kicks in after deficits carry the initial load, but in this recovery bank lending arguably has been constained by stringent capital requirements.

      1. @Fin,

        Policy might be more effective once it is more widely understood that the recovery is restrained by a lack of credit worthy borrowers rather than stringent capital requirements.

      2. @Winslow R.,

        Agreed, but I think it is both. For example banks don’t want to extend credit to FICO scores below 650 because they are penalized for doing so. These borrowers have more propensity to spend than high income earners. It isn’t dissimilar to payroll taxes that are highly regressive and remove income from the population that will more likely spend it.

      3. @Fin, You’re leaving out Liars Loans, White Collar Crime & Control Fraud?

        Banking has to be regulated to align with public purpose as expressed through national policy. Since each nation’s policy is to independently pursue available options, why on earth would they set up open conflict between banking and other national policies?

        Warren’s right. Fiscal policy can’t be separated from national policy. The fiduciary duty of a gov is to ALL of it’s citizens holding “stock-ownership” in the country.

      4. @roger erickson,

        My point is simply the pendulum of regulation can swing to extremes to the detriment of the public sector. Regulators tend to make pro-cyclical policies at exactly the wrong time….where were they when liar loans were being made and triple-a cdo’s were being created with triple-b collateral? Banks are public/private entities that need to make an acceptable return for shareholders that are willing to take first loss risk. If regulation and capital requirements are to onerous the primary result will be an increase in credit cost to consumers and business. Btw, I don’t think Warren would fundamentally disagree.

      5. and if some rogue international bank comes into your country and starts making bad loans why do you care?
        whoever gets their funds and doesn’t pay them back is the winner, not the bank with the losses charged to its foreign investors.

  2. The problem is that they let the banks operate internationally, but they only regulate them at the national level. And in the EU, the banks are not even regulated by the countries they do business in, but rather whichever country they’re incorporated in.

    You’re right that if they only care about protecting the state from losses, they only need to regulate the banks they insure. BUT to keep those banks safely that means they would basically have to restrict them to doing business in their home country. The French gov’t can’t let French banks lend gobs of money to Icelandic banks, because the French gov’t lacks auditing authority and takeover authority over those Icelandic banks, and can’t really know how safe the investment is.

    And similarly Icelandic banks are free to do business in Britain and take deposits from Brits, and the British gov’t is not allowed to regulate this at all. The British gov’t would like to guarantee all Brits’ deposits and regulate the banks involved, as they have for many decades, but suddenly they can’t because the banks are legally Icelandic.

    They tried to solve all this by requiring EU countries to insure and regulate all their native banks, but as we’ve seen with Iceland and Ireland that is basically a stupid, nonviable plan and can’t be relied on.

    Now the obvious solution is to say that French banks can only do business in France. That way the French authorities can keep tabs on everything and handle any problems, and not have to worry about insuring the whole world’s deposits. But this goes against the EU elites’ (and elites in most countries) strong desire to allow unrestricted international trade, investment, and lending, so they won’t even consider it. They are similarly not willing to create an EU institution with all the powers the Fed and FDIC have. So what they do is let capital run free and try to patch things up with inadequate international treaties.

      1. @WARREN MOSLER,

        Unfortunately they see it as a free trade issue and most EU technocrats always support free trade as a matter of principle. The only political groups which question this are old school socialists and hard-right nationalists.

    1. @Chaz,

      The British gov’t would like to guarantee all Brits’ deposits and regulate the banks involved, as they have for many decades, but suddenly they can’t because the banks are legally Icelandic

      That doesn’t make any sense to me, can’t the UK government guarantee any GBP? Say the Icelandic bank goes bankrupt and gives you the finger on your deposits, you’ll be on the unsecured creditors list, just go the UK government with this list, and they can credit any bank account of your choice with the same amount of GBP. Or am I missing something?

      1. @Tristan Lanfrey,

        That’s exactly right. The issue is that Britain doesn’t want to just guarantee foreign banks and then leave them free to take risks willy nilly. If they’re guaranteeing a bank then they want to exercise some control to keep it from taking big risks. They don’t want to guarantee deposits in foreign banks and then give those banks a blank check.

  3. Main front page headline in today’s Financial Times was “Massive softening of Basel Bank rules”. Now who’d have guessed that banks would knobble regulators? . . . . Everybody apart from regulators!!!!

  4. Warren Mosler wrote:
    “and if some rogue international bank comes into your country and starts making bad loans why do you care?”

    If my national regulators established an over-zealous capital standard, and some international bank was exempt and exploited the regulatory arbitrage … I would care alot as my customers walked to the new competitor while I was handcuffed.

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