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Sharon's OpEd for the Financial Times - 'Basel III faces repeat of old problems'

September 13, 2010 9:00 AM

We had Basel II and where did it get us? Many would say into the financial crisis. Certainly it has received a lot of criticism for being pro-cyclical. As we contemplate the release of Basel's latest outpouring it seems that many of the old problems may be repeated along with another very big one - where is the money coming from?

There were actually some very good clauses in Basel II, the problem is that a lot of it was in Pillar II - the recommendations about how supervisors should evaluate activities and risk of individual institutions to see if there should be extra capital requirements - and therefore optional. Pillar II sensibly argued it was a good idea to put capital charges against complicated securitisations that were not understood.

How useful that would have been: we might never have had a financial crisis. So by and large I am a fan of Pillar II, apart from one thing: nobody complied. It was in essence a repository for all those things that should be done under an intelligent supervision system, but which never would be done because nobody wanted to be the first to move and suffer a competitive disadvantage.

So now what are we going to have in Basel III? Four layers of capital - a base layer of some 5%; another which is a "warning-level" layer; then a buffer layer, and finally a systemic layer.

I do like what we called 'a ladder of intervention'. So I understand the second layer. But I start to get worried about how the other layers will work. Does it all get a bit Pillar II like and require discretion? The economic effect of banks having to substantially increase capital is also significant. It is ironic if one considers that had dynamic provisioning or buffers already been in place economic conditions would dictate that capital be released from them right now rather than a drive for topping them up.

It is possible that in the EU we have cracked the consistent application of capital with the birth of the new supervisory authorities, but that does not guarantee that there will be appropriate transposition of Basel III into EU legislation. In a report about bank capital in anticipation of Basel III, due to be voted in my committee on Monday, amendments have already piled in demanding delay, watering down requirements, enshrining exemptions and specificities. There is little support for greater harmonisation. Skittish markets may well wonder what we know that they don't.

Meanwhile all the high-level rhetoric about regulation is directed to naked short selling, hedge funds, derivatives and credit default swaps. These may need attention, but they did not cause the crisis. Ordinary people know that banks and bank capital were central to the crisis because they are all paying for it now in austerity measures. So the Basel bankers and regulators are right to be tough to design a stronger, more resilient, capital base. EU politicians should be tougher and put the bank capital debate more centre stage, bringing some accountability to Basel, instead of keeping in their national comfort zone by running to the populist rhetoric on other regulations.

Then we come back to affordability, although Basel is now allowing 10 years which should be enough to permit harmonisation. Politicians are not blind to the problems of the real economy and the need for banks to be able to lend. But do they really expect us to get it right when they won't give us the figures? All the aggregates are cloaked in secrecy; banks stamp confidential on everything Basel can't tell us. The only hard numbers we get are the sizes of the bonus pools.