By Richard Smith, surfacing briefly again.
Jon Daniellsson of the LSE has spotted something odd about the Basel III debate on capital levels:
In the ongoing debate on Basel III, one of the most contentious issues has been the level of bank capital. One might think that the countries making the biggest public noises about problems of excessive risk-taking and speculation would be exactly those demanding higher capital. After all, higher capital directly reduces leverage and risk taking, increasing safety.
Surprisingly, it is the opposite.
- The main champions for more capital are the US, UK and Switzerland,
- The opposition is led by Germany and France.
And he speculates darkly about the reasons why the French and Germans oppose giving national regulators discretion to impose higher capital levels than the new Basel III minimum (7% of RWAs):
Perhaps, the real reason for the French and German opposition to variable capital standards can both be found in weaknesses in those countries’ bank assets and their willingness to use taxpayers’ money to bail out the banks.
Could be, but one would like some evidence. Besides, the other link between the US, UK and Switzerland is that they all recently engaged in really massive banking bailouts, and may not feel like repeating the exercise for a while, thank you.
There’s something else though, that might better support Danielsson’s claim. In parallel with the debate on Basel III capital levels, we have plenty of chatter about the effect of a Greek default on the financial system. The bosses of the big banks are saying it could be pretty nasty; here’s Ackermann of Deutsche Bank:
Josef Ackermann cautioned against any steps that could spread the crisis to other vulnerable countries in the 12-year old currency bloc.
“If it is Greece alone, that’s already big. But if other countries are drawn in through contagion, it could be bigger than Lehman,” the Deutsche Bank chief said at a Reuters banking event on Monday.
And here’s Ghizzoni, CEO of Unicredit:
If, after a year of discussion without conclusion, we conclude there will be a haircut, the next morning the market will massacre Ireland, Portugal and maybe other countries.
So would a Greek default be another Lehman, or bigger, or a “massacre”? We are going to find out eventually, and for what it’s worth there is a robust challenge to the doom-mongering in today’s Guardian, though I am surprised its writer thinks there was no warning of the Lehman collapse. He should have been reading “Naked Capitalism”. Certainly, though, no-one did much to prepare for Lehman’s very foreseeable implosion; in which respect it does resemble Greece somewhat.
Perhaps the real point of these utterances is in fact to start getting ready for a Greek default, or default-like event, or whatever it will be. From a bank exec’s point of view there’d be no harm in a spot of proactive corraling of the politicians, who have much more say in bank capital and liquidity levels, especially in a crisis, than the Basel committee. For an indication of progress on the corraling, refer to Merkel:
Merkel said June 18 in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis.
“We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. “I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”
Frau Dr Merkel is well and truly onside with the banks, I would say, even down to this irritating “Greece is another Lehman” meme (shade of last year’s interminable “Country X is not Country Y” burblings from all and sundry).
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.