Walkback on Basel III Confirms Bank Victory on Regulation

The Wall Street Journal reports that a key element of Basel III rules, its provisions on liquidity buffers, are about to be watered down. Note that many, including this blog, deemed Basel III to be too weak and flawed in many critical regards (see here, here and here for some examples; among other things, its preservation of flawed risk weightings, delayed implementation and undue reliance on moving derivatives to exchanges rather than questioning their use).

The overview:

International regulators are poised to ease a core element of new banking rules that were designed to improve the safety of the financial system, with some regulators fearing that plowing ahead with tough new requirements could exacerbate the current European crisis, according to people familiar with the matter.

Following months of intense industry pressure, regulators say they now plan to make it easier for banks to comply with a key provision of new international banking rules that will require lenders to maintain sufficiently deep pools of safe, liquid assets—like cash and government bonds—that can survive market meltdowns and other intense crises.

Now, changes to the rules will allow a wider variety of assets—such as gold and equities—to count toward banks’ liquidity buffers, among other changes envisioned to soften the rules, according to people involved in the talks.

Equities? Gold? This is deranged. Remember the S&P at 666? How gold would swoon with no proximate cause on bad market days? Volatile assets are to be treated as liquidity buffers? A liquidity buffer doesn’t just mean you can sell it in a pinch, it also means you can sell it and have a fair degree of certainty as to what price it will fetch.

As traders put it, in stress times, all correlations move to one. And we see a tendency toward that even now, with global markets exhibiting a “risk-on, risk-off” propensity. During the crisis, you see markets seemingly unrelated to whatever the bad news of the day was take sudden nose dives. Why? It looked to be hedge fund margin calls. When a trade is pressed to raise cash, he is probably not going to sell a position in market that it already roiled if he can avoid it. First, he may believe (correctly) that if he rides the panic out, he has a winner, or at least can exit at a better price. Second, he may not get a bid on a trade big enough to solve his problem. A trader will instead, if possible, sell a position in which he has a gain, and that could be anything. And this pattern was one big way that selling propagated across markets.

What is the rationale for this barmy move? First, that a lot of banks may not be able to handle meeting this requirement by 2015, which is when the liquidity requirement kicks in (keep in mind Basel III is most germane for European and UK banks. The US never got around to implementing Basel II, although it did hew to some of its approaches, and US financial firms, led by Jamie Dimon, have made Basel III a political hot potato). Um, so tell me why regulators allowed banks to pay dividends and hand out handsome compensation to executives and staff? This is an admission of a gross failure of oversight, but of course, that’s not how its being presented. Instead, we get this:

“In current exceptional conditions, where central banks stand ready to provide extraordinary amounts of liquidity against a wide range of collateral, the need for banks to hold large liquid asset buffers is much diminished,” Bank of England Governor Mervyn King said Thursday in a speech at a black-tie dinner in London. “I hope regulators around the world will take note.”

Translation: Because central banks will now do whatever it takes to prevent banks from falling over, why do they need to worry about liquidity? Of course, we’ll put aside the fact that the ongoing “prop up the banks rather than fix them” is leading to a rerun of Japan, zombification of the underlying economies. And unlike the Japanese, the West lacks the social cohesion to share costs and take diminished living standards gracefully.

King may think he’s saying that Basel III should not be implemented now but he is smoking something very strong if he believes that. According to banks, there is never a good time to make life tough for them. When times are bad, like now, they claim it will hurt their ability to operate (the regulators also seem unwilling to accept that we need a smaller financial sector, and inflicting some pain on them while applying offsetting fiscal stimulus would be a much better approach). And when times are good, there’s no problem, so why should they be asked to change behavior? The banks have learned that the trick when things bad is to engage in delaying tactics so that media and public attention move on. For instance, they managed to forestall regulation in the wake of a 1994 derivatives crisis that destroyed more value than the 1987 crash by running the clock out.

The endgame has been clear. The banks learned that all they have to do is mutter darkly about armageddon when financial markets are rocky and the authorities will fold, pronto. As Richard Smith noted last year, when banks were pushing back against giving national regulators the authority to set bank capital standards higher than Basel III minimums:

The message that’s coming through loud, clear and confident from these media statements, and from the Eurolobbying against the Basel III rules, is this: bank capital and liquidity are not going to be problems for the banks. Instead, the politicians will fix it, which is to say, some angry taxpayers, somewhere, will fix it.

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  1. F. Beard

    Equities? Gold? This is deranged. Yves Smith

    Not if we’re being groomed for a new gold standard (I suppose “equities” was thrown in there as camouflage).

  2. LeonovaBalletRusse

    “it will hurt their ability to operate” — Wouldn’t that be a good outcome for the rest of us?

  3. F. Beard

    “International regulators are poised to ease a core element of new banking rules that were designed to improve the safety of the financial system, … “

    LOL! How many more Depressions and World Wars will that take? How many more can we stand?

    I read something about the definition of insanity …

  4. Richard

    Excellent post.

    Of course the ‘prop up the banks at all cost’ policy made it easy for the banks to beat back the feeble attempt at regulation.

    More important is your observation about how we are implementing policies that lead directly to the Japanese zombification of our economies. These policies are only good for the bankers and are truly awful for society.

    I keep hoping that as Obama sees that these policies are effectively costing him the election he and the Democrats will end the prop up the banks at all cost policy.

    Matt Stoller is probably right that members of the Administration see a big payday ahead for them for having supporting what is a failing policy, but it is not clear that events in Europe might make it impossible for the banks to pay off.

    1. YesMaybe

      Well, he did say “no more bailouts” in his SOTU address. Of course, when the time comes he’ll prove he was lying. The only question is whether it will be before the election.

    2. Fiver

      But these policies are NOT costing Obama the election. The Republicans ensured that Obama would have no serious competition by running what is undoubtedly the oddest assemblage of duck pins ever seen. This was quite deliberate, the price for being saved from the smoking ruin of the crash in 2008 & the subsequent revelations of massive corruption on all sides, private and public, which should’ve utterly destroyed the “Republican” brand. Instead, with the Dems help in perpetuating this charade, it’s their turn again in 2016, unless the American people, at the 11th hour have an epochal epiphany.

    3. different clue

      Well then, the individual Ancient Families of Old Money Dynastic Wealth who hide behind and above the Diversionarily
      Visible banks will simply pay-off Obama and their other servants in Government from their own personal and family wealth. If they can’t give Obama any “money” for example, they could still give him and his family a thousand acre ranch in Paraguay. It is to laugh? Better Paraguay then facing an angry public which has more bullets than all your private armed guards have.

  5. Edward

    I am afraid, sir, that you don’t know what you are talking about.

    You conflate the action of paper gold with the real thing. Physical gold and paper gold have very little to do with one another. We have a fractional gold reserve system. It was put in place and maintained as part of the management of a dying monetary system, namely the $IMF system. It’s a long story and it involves oil, but I don’t have the time or the inclination to discuss it here. Suffice it to say that its days are numbered.

    Invoking the action of paper gold in ’08 as a evidence for why physical gold should not be declared an asset, a tier 1 asset, for that matter, is ample evidence of your deep lack of understanding of the forces at work in the world of money. Physical gold isn’t remotely volatile, it is, in fact, without question, except to the blinkered mind of someone with no awareness of monetary history, the most stable, the least volatile, and the most robust monetary asset on the planet. Sovereign debt is on its way out as the place for savers to save. Physical gold is waiting in the wings to act in that role. Currencies will function as they should, nothing more than mediums of exchange, notes of zero maturity, designed to avoid barter.

    We aren’t going back to a gold standard as it was practiced before Bretton Woods, but gold, sans the paper gold market, will float freely against all currencies. Gold will act as it always has, as a reference point for value. The Banking system, and bankers, even, I suspect Ben, “Central Banks hold gold out of tradition” Bernanke are aware of this inevitable evolution even as they avoid discussing it for what should be obvious reasons. In the meantime, I suggest you re-educate yourself pronto.

    1. F. Beard

      Physical gold isn’t remotely volatile, it is, in fact, without question, except to the blinkered mind of someone with no awareness of monetary history, the most stable, the least volatile, and the most robust monetary asset on the planet. Edward

      And that’s why gold went from $800 to $265 an ounce?

      Gold is simply an overvalued precious metal that was once privileged by government as money. Without that privilege or the expectation thereof, gold will once again sink to its mere commodity value.

      And you should consider that gold’s supposed “stable value” might be nothing more than a consequence of limiting the economy’s real growth rate to the mining rate of gold by requiring that money be backed by gold. That’s neither just nor likely to be optimal either.

    2. Emily Dickinson

      Dear Edward, sir, but surely
      You’re what’s called a Gold Bug —
      Which makes me think of Poe
      And madness, and the jug.

    3. YesMaybe

      If physical gold is of stable value, pray tell us what it’s value is now and the range it’s gone through over, say, the last twenty years. To avoid confusion regarding the value of the dollar, you may use 2011 dollars or something else. Please also enlighten us as to where your figures come from.

      1. Woody in Florida

        I hope everyone understands you are just making an attempt at humor and that your comment has no actual value beyond the smiles it brings. The boiling point of Gold in this case has no bearing on its volatility, or more specifically its lack of volatility. The price of gold does not reflect the value of gold, but rather a combination of factors such as faith (or lack of) in fiat currency and/or the printing governments. Gasoline is volatile and lots of people seem to use it and profit from it.

        1. enouf

          well said!
          .. and i think everyone responding to Edward is asking all the wrong questions (too many presumptions and false characterizations — like comparing Apples to ..oh ..say Sheep) .. and i think Woody in Florida starts to touch upon the answers to those misguided questions.

          just my 2 cents


  6. craazyman

    why don’t we just get it over with already and ackowledge the “Banker Caste” as the highest and most divine embodiment of the God head.

    Then we can all sweep the floors and clean the toilets in peace, knowing that our labors are in service of a higher destiny and order than our little selves, whose fate it is to worship and serve what is just and good, and who thankfully praise the cosmos for this clarity it brings to us.

    Beneath the banker caste is the lawyer caste and beneath that is the warrior caste and the administrator caste and then all the TV watchers and NFL fans and beer drinkers and Obama and Romney voters. hahahah. This could get funny. If it were funny.

    I don’t know man, maybe they need a uniform or insignia of some sort, so they can be known when the walk among us. Maybe a swastika?? Just kidding. LOL.

    1. Mansoor H. Khan


      “Just kidding.”

      I hope your are kidding. This banker bullshit is deadly serious. It tends to lead to depressions and world wars.

      Our salvation is in educating each other. Other large and powerful corrupt institutions have been dismantled by humanity in the past (read world history). We (humanity) must earn our salvation a little bit:

      Here is how the bankers’ game is played:


      mansoor h. khan

  7. Enraged

    “The message that’s coming through loud, clear and confident from these media statements, and from the Eurolobbying against the Basel III rules, is this: bank capital and liquidity are not going to be problems for the banks. Instead, the politicians will fix it, which is to say, some angry taxpayers, somewhere, will fix it.”

    Via riots, government overthrows, civil wars and many, many casualties. UInless we get thrown into a war first…

  8. Edward

    Physical gold isn’t remotely volatile, it is, in fact, without question, except to the blinkered mind of someone with no awareness of monetary history, the most stable, the least volatile, and the most robust monetary asset on the planet. Edward

    “And that’s why gold went from $800 to $265 an ounce?”

    Paper gold did. Physical in size, which is what matters, didn’t. You too, have no clue.

    No, Emily D, I’m not a gold bug, just as you’re not a poet.
    Were I a gold bug I’d be advocating what gold bugs advocate which is that gold should function as both a currency and a store of value, and that it should be regulated by governments who, as they once did, fix its price. Make no mistake, Gold’s not in a bull market, it’s in a massive phase change that is part and parcel of the evolution of the planet’s mortally wounded dollar based monetary system. You all need to set aside your unhelpful preconceptions and recognize what’s happening.

    1. Skippy

      It is only a store of people’s expectations, nothing more. To embellish it as anything more, it to perpetuate a lie from antiquity.

      1. enouf

        So .. by this logic, if i’m expecting to take a dump soon, i could market that and capitalize on it? Perhaps i could sell bonds against it, …and rehypothecate it to the umpteenth degree?

        Oh wait .. i forgot about the derivatives!


        1. F. Beard

          **if i’m expecting to take a dump soon, i could market that and capitalize on it? enouf

          Gold has been marketed for thousands of years. Our language is suffused with positive references to it such as “the gold standard” of this or that, “the golden years”, gold medals, gold stars, etc.

          But whatever gold’s merits are as an element they are obsolete at best wrt money.

          1. Mansoor H. Khan

            F. Beard said:

            “But whatever gold’s merits are as an element they are obsolete at best wrt money.”

            The above statement true only if a high level of trust exists for institutions. Governments and banks must be trusted in order for modern accounting ledger based money to work. God forbid that trust collapses so low that people only trust physical non-paper money.

            mansoor h. khan

    2. Yves Smith Post author

      I was going to start with the ritual, “with all due respect” but honestly, your intelligence is questionable if you believe what you wrote. Physical gold trades in relationship to commodities futures. Futures prices converge to cash. And gold fell during the crisis, reaching a low in the high $600s per troy ounce. It is highly volatile on a day to day basis, which makes it completely unsuitable as a liquidity buffer.

      Separately, I don’t have tolerance for goldbugs highjacking discussions of policy issues.

      1. enouf

        Yves; and i definitely sincerely mean this; “with all due respect” — and I understand this is *your* blog, and can freely ignore my comments, and carry on.

        I personally don’t think Edward’s comments make him a ‘gold bug’ – stereotyping and generalizing is almost as bad as ad hominem. I would love to hear F. Beard (whose proposals about currency and debt jubilee etc., i have i ‘ve been absorbing and giving serious consideration to lately) and Edward (et al) discuss this further. I would love to hear Edward explain in greater detail, as his 1st comment above alludes to not having the time. Perhaps he might enlighten me/us/we.

        I think you too (and this is where i need to insert the “with all due respect”) *might* unfortunately being blinded by the way the “System” (as we know it today) encases precious metals as a commodity, offers derivatives of Bullion as Paper Certificates, and uses those fraudulently to severely distort an already hideous financial sector ogre.

        I think we need what otherwise would be a Trustworthy, Non-Debt-based, Non-Counterfeiting Monetary system… and Gold/Silver/Copper would operate in an entirely different capacity if such a system existed.


        p.s. I Am Not An Economist (IANAE) ;-)
        p.s.s. Whatever you decide Yves, i have the upmost respect for all you (and others here) do.

        1. enouf

          I said;
          .. i would love to hear..

          Yves, to be clear, I completely understand if you think this is not the time, nor the place to discuss these things further.


  9. Jesse

    Say what one will, at some point the world is going to be presented with a fait accompli by a few of the larger non Anglo-American central banks voting their reserves.

    Things are changing. What was is not, although it is difficult to see this close up.

    If one understands that, there is money to be made. And if not, well then, you are fortune’s child.

  10. Edward

    Um, no, Skippy. The record is crystal clear that physical gold, as opposed to sovereign debt, or just about any other asset you can name, save certain objet d’art has maintained its purchasing power over great expanses of time. Everything else in the monetary realm, stock certificates, currency, the already mentioned sovereign debt, and commodities, which degrade, and land, which can be taxed-gold can only be taxed at the point of sale, can’t compete with golden grams. There are excellent reasons why gold is the wealth reserve par excellence, and while I can see that you and Mr. Beard don’t like the facts, attempting to elide them is childish where it’s not just plain stupid.

      1. YesMaybe

        You still haven’t answered my question, which should be very simple to do if you know something we don’t about the value of gold. I’ll restate it:
        “If physical gold is of stable value, pray tell us what it’s value is now and the range it’s gone through over, say, the last twenty years. To avoid confusion regarding the value of the dollar, you may use 2011 dollars or something else. Please also enlighten us as to where your figures come from.”

        I get the feeling all you’re actually saying is gold has always been valuable. That’s true. But if you’re making claims about the volatility of the value of paper gold vs physical gold, you should be able to quantify the value of physical gold over the last few decades at least.

        1. enouf

          Allow me to try;
          (and i think this is from G. Edwards – author of “Creature from Jekyll Island”). ..and I’ll go back Millenia, forget a few decades (which doesn’t apply anyway, since the Fed as you know has been in business since 1913).

          What one ounce of Gold Bullion can buy today is ~ the same amount of Goods and Services it could buy back in Caesar’s days.

          Now, Paper derivatives are inherently evil, and a scam and are about as worthless as FRNs are (or, will be) once this whole thing implodes and collapses upon itself.


          p.s. Your seemingly repetitive snarky questions seems to me like you want someone to give you the (winning) results of next week’s lottery. ..today. Maybe i’m mistaken.


    1. skippy

      I grok it quite well, family owns a couple of hundred thousand acres with plenty of it around and I have studied its history from its earliest appearance and its social application[s globally.

      It was just the easiest long lasting metal, commonly found lying around globally (hence many regions discovery coincide with in short time lines), needing no refinement, that could be shaped into decorative ornaments. A good artistic medium in its inception…eh.

      Now it got its start in the application most find familiar, with the god kings. Gold became an expression of their power, shining, long lasting, durable, cough god like, et al.

      That they used this example of their godhood status as a means of exchange, only reinforces, their power and control, over their human chattel. From this point on, this common metal, has been the focal point of epic proportions, of death, murder, raping and pillaging, conquest, subornation, diminishment, etc. It is probably tied with sexual rights to women, for acts of violence, or second, in human history.

      So if you wish to take the classicist view (arm chair thunkit), that’s your prerogative, but, it does not mean it is an unassailable fact or that will hold up in perpetuity. It is based on a shared belief… cough religion… and nothing more. History is chuck full of bad axioms Edwards, why repeat them? Continuity of wealth[?], we know where that road leads too… eh. Is that what you desire for?

      Skippy…. Um, no… ROFLOL… potable water will soon be the most valuable asset globally, surpassing even oil, monetize and market that, and gold will be a fond memory.

      1. skippy

        To boil it all the way down… yours and others shared belief in the value of gold… gives their desire[s the breath of life. They have, and can come, and take it. Whats the value in that?

        Skippy… that’s how the gawd head game works.

        1. psychohistorian

          So skippy, here is the deal.

          I have an IRA and need to “invest” it in something…even staying in cash is an investment. At this point in my life my goal is to conserve capital.

          When I learned economics in the late 60’s, early 70’s the history was fairly clear about the bad odds for equities. Instead of bonds, until late 2008, I had the small IRA I have in T-bills. In 2008, when a couple of wheels fell off our system of governance and rule of law, I decided that the US dollar was no longer a stable currency. Because of the historical value of gold across centuries and seeing multiple countries still valuing it, in October of 2008 I moved all my IRA to GLD which is an ETF. Since then the “value” of my IRA has doubled and it has been very helpful with my life changes during that period.

          I still have all my IRA in GLD and intend on keeping it there until some resolution of our current global Shock Doctrine event give me some clarity about a more stable investment.

          While I understand all the history of gold and reasons why it shouldn’t continue to be regarded by so many countries as valuable, that fact is that is still has a world wide ‘value” that has outlived how many currencies and countries? I am trying to conserve the little capital I have left and challenge you to provide me with alternatives that aren’t palladium or silver, etc.

        2. skippy


          Do as you wish or as you must. My point is the story’s some tell about gold are factually incorrect. They skewer actual history in an attempt to validate their position[s, an act done purely for personal gain, regardless of history’s example. This is deceptive.

          Personally, I view the markets as an aberration of human potential and the ability for this planet to support life, in the long run, in its present form.

          Skippy… Knowledge and skill are the best capital in my book, the rest is transitory at best. Hell you survived a side-door mirror to the head, how much was that worth?

      2. enouf

        You make some really good points; thanks for the comments. (especially as it pertains to resources needed just to sustain life and ecosystems).


    2. LeonovaBalletRusse

      YVES, “Edward” sounds so much like that obnoxious troll who picked a fight with everyone “beneath him” a while back, with the foul mouth. Recall? Same style.

    3. F. Beard

      I don’t give a flip what you use for private debts only (so long as everything else is allowed too) but government must ONLY recognize its own inexpensive fiat as money.

      It is hypocritical to claim gold is money and then insist it be made so by government FIAT (intentional irony).

      1. enouf

        would you agree that a decent definition of “Money” is;
        — a medium of exchange ?

        I recall a thread not so long ago where you said you *tend* to use Money and Currency interchangeably – am i right?

        Would you mind also defining “Government”?
        If you definition includes the word “public” then i must ask you to define “public”.

        Thank you (as you and i, …and all bottom-feeders, cough*lawyers*cough know, definitions of words; “the devil is in the details” is quite important — as such, you frequently hear me mention and promote “simplicity” and “conciseness” (axiomatic) above all else, first and foremost).



  11. Fiver

    The stunner would be if the current cast of politicians and regulators didn’t “fold”. Does anyone believe the public interest has had a chair inside the building, let alone at the “negotiating” table, at any time over the last couple of decades? Or that any rules, whatever they were, decided now but to be implemented that far down the road would be enforced by the current crew’s crud successors? Nobody better knows another major crisis is certain than the bankers themselves.

    So my question for Yves is: what is the PRESENT purpose of this? Is it an attempt to contain inflation expectations right in front of a major Central Bank money bomb? What does it imply re the current value of various bonds, but particularly sovereigns, or has sovereign finance just been pronounced dead? Are Central Banks, as the core institutional representations of the fusion of political and financial power as agents of the “1%” so eager to return to the shadows they are spinning-off money-creation entirely? If banksters will be able to create capital virtually at will, are we not going to be bombarded with propaganda to buy, buy, buy stocks, stocks, stocks, safely hedged with with gold, gold, gold (as if a “hedge” exists for madness). Is this the green flag for the next shadow-banking system? Who, in short, does this pay off for big time right now? Gee, why did JP Morgan pop into my head first?

    There is going to be major CB action soon regardless of the outcome in Greece. But I surely hope our Greek friends say “NO” that they may inspire courage where it has been so sorely lacking, in all those who know full well our futures are at stake, but cling inert to detached comfort everywhere.

    1. skippy

      You’ve seen one cult, you’ve seen them all.

      Skippy… you do realize that human history is older that 4000ish years and not every society or civilization used gold to the same ends, right? Mostly, it was an elitist tool of symbolism.

      PS. go read 5000 years of debt. That should give you a few paths to start down. As jesus clint eastwood of above links photoswap would say “The less secure a man is, the more likely he is to have extreme prejudice.” Good luck with that, Ed.

    2. F. Beard

      Bug off gold-bug.

      The solution to the money problem requires principles, ethics and liberty, not State sanctioned shiny metals.

  12. different clue

    (Scene from the chaoticrash future . . . )

    Thirst-crazed refugees approaching a well-defended Survivalist Fortress: ” Help us, good Sir! I and my children are dying of thirst! Do you have any water to sell?”

    Keeper of the Fortress Gate: ” And pray tell, good Sir . . . what do you have to buy our water with?”

    Thirst-crazed refugee father: ” I have ten gold Krugerrands!”

    Keeper of the Fortress Gate: “Well aren’t you the lucky lad! It just so happens that glasses of water cost only ten gold Krugerrands a glass!”

    Kurt Saxon once wrote than anyone trying to earn their way into a Survivalist Community with visible knowledge, seeds, tools, etc. and firm signs of being a human asset should be let in. Anyone trying to buy their way in with gold should be killed on the spot and their gold should be thrown into a quicksand tar pit volcano or some such thing where it wouldn’t hurt anybody ever again.

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