Basel’s New Banking Game Rules

The new rules on bank liquidity, now agreed by the Basel Committee on Banking Supervision, will contribute to reducing banks’ risk-taking. But not a lot, and only slowly. Under pressure from the banks themselves, the rules have been softened and their implementation slowed down. Timidity in tightening requirements is justified on the grounds that too fierce and too rapid rebuilding of bank balance sheets would take too much out of the real economy and so contribute to the much feared double dip recession. But beware!

The 2008 crisis was caused by banks creating off balance sheet vehicles in which they carried unspecified liabilities which, as they were off balance sheet did not have to be taken into account when calculating their reserve ratio. The game of hiding real liabilities has, of course, gone on since time immemorial, but in recent decades reached new levels of sophistication. The Private Finance Initiative serves the same purpose – hiding the real situation – in national accounts. Creative off balance sheet accounting is a highly rewarding, but dangerous game. So far the Basel Committee members have been less than transparent on how they will prevent it corrupting their good intentions. Moreover, allowing till 2019 before the new requirements are fully implemented, gives creatively minded bankers plenty of time to think round revised definitions of capital.

So rather than playing the game, in which regulators will always be one move behind, it is surely time to insist auditors, especially bank auditors, live and die by their “true and fair” certification. Never mind the cunning details of off balance sheet liabilities, do the accounts present a true and fair assessment of the overall position, especially with regard to riskiness? And if auditors get it wrong they should be suspended, or struck off.

The Basel Committee’s new rules are also criticised for not addressing the “too big to fail” critique. Confirmation of Bob Diamond as new CEO of Barclays confirms their continuing reliance on the exciting business of investment banking for future growth, rather than the boring business of supporting the real economy, which was why banks existed in the first place. Diamond argues that people don’t understand banking and that’s why they want to break banks like Barclays into two separate operations. But, maybe, people understand only too well.

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