Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Sighs of relief heard from the bankers' bunkers

By Adam Creighton - posted Tuesday, 20 September 2011


Banks might have feared big changes after the global financial crisis. Millions around the world were thrown out of work as bankers pocketed pay that would make Croesus blush.

Taxpayers were shackled with world war-debt levels as governments rescued, even bought, banks deemed ''too big to fail''. The convenient fiction that banks competed at arm's length from government, subject to the bracing rigours of capitalism, was shattered.

In fact, what played out - privatisation of profits and socialisation of losses - was a gross perversion of capitalism.

Advertisement

The Basel Committee on Banking Supervision, the international forum of bank regulators whose risk-management standards facilitated the disaster, retreated to Switzerland in deep introspection.

In December, it emerged with Basel III, a new set of ''tough'' rules that update Basel II, itself a new rule book that was being bedded down as the financial crisis got under way in 2007.

The minimum capital ratio (which affects the mandatory gap between banks' total assets and liabilities) would remain 8 per cent of risk-weighted assets. But the quality of its components would increase. Moreover, a new ''leverage ratio'' would limit banks' assets to 33 times (!) the value of their capital. Regulators would also get more discretion to bolster minimum requirements.

If that were not tough enough, full implementation would occur before 2019. It was as ferocious as unleashing a pack of poodles on a herd of elephants. Sighs of relief in Wall Street, Canary Wharf and Martin Place, where banks are already close to satisfying the new requirements, were almost audible.

Britain before the GFC was like an island hedge fund gone hopelessly long on financial services. It has suffered more than most countries - its public debt has surged more than 25 percentage points, or £400 billion ($A615 billion), to 85 per cent of national income.

Sir John Vickers, an Oxford don and former chief economist of the Bank of England, was commissioned last June to investigate how to make Britain's banks more robust and curtail the implicit subsidy taxpayers had been providing - a ''free'' subsidy estimated to be at least £10 billion a year, equivalent of the total annual profits of a handful of major banks.

Advertisement

The commission's findings, released this week, did not mince words. It thought Basel III "insufficient, albeit a major improvement", and argued "massive enhancement is needed". It's not hard to understand why.

The Basel III minimum capital ratio of 8 per cent, of which only a bit over half has to be ''cash under the bed'', is calculated as a proportion of ''risk-weighted'' assets. That's typically half the measured value of bank assets, so ''real'' capital ratios are closer to a handful of percentage points. Imagine being insolvent if your share portfolio dropped a few per cent. Moreover, risk weights themselves are arbitrary, clunky, and ripe for bank manipulation.

By contrast, Sir John's commission estimated that capital ratios of between 16 per cent and 24 per cent would have been enough to protect hapless taxpayers from forking out billions to prop up creditors, ''bonuses'' and shareholders. It would have largely excised the ''too big to fail'' problem.

  1. Pages:
  2. Page 1
  3. 2
  4. All

This article was first published in The Age on September 16, 2011.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Adam Creighton is a Research Fellow at the Centre for Independent Studies.

Other articles by this Author

All articles by Adam Creighton

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment Comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy