Yves here. Satyajit Das recaps how post-crisis bank regulations have been gutted, and describes some of the tricks of the lobbyists’ trade. As disturbing as this situation is to those who don’t wont to be subjected to yet more taxpayer pillage via another monster system rescue, it’s made even worse by the fact that the post crisis reforms were pretty toothless to begin with. For instance, from a 2010 post by Richard Smith, This is Basel III?:
Arriving at the rush, with extra impetus doubtless imparted by the recent and ongoing Eurobanking panic, we have the Basel III capital and liquidity reforms…
So, errm, for the moment, what we have are just some capital ratios, actually. Enough to get DB moving: they are raising another EUR10Bn, at the front of the queue. So I suppose the Germans are once again first to put their beach towels on the prime sunbathing spots…
But why be all that enthusiastic about Basel III? It’s still the mixed bag I wrote up here. I see that the end-2012 implementation “with appropriate transition and grandfathering arrangements” now translates to something that won’t be fully elaborated until 2020. All together: quelle surprise!
So what do we think about the capital requirements? Relative to the insane 2% common equity cushion endorsed by Basel II, the new 4.5% requirement, with another 2.5% to be phased in by 2019 (not much sense of urgency there) looks much better. There’s a limit to what any capital requirement could do, of course.
Here are my main gripes:
Valuation: the capital ratios mean nothing if the assets are overvalued. Waldman is always going on about this. It ends up as quite a radical critique: capital ratios without valuation reform = cart before horse.
Accounting: there is still no harmonization of accounting practices on all the shadow banking apparatus: for instance, special purpose vehicles, derivative netting and repos. Actually, of course, when you come across things like Repo 105, or BoA’s quarter end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool probably is an outlier, some of this stuff really, really needs fixing. And do we think that under Basel III there will be more accounting dodges that will cross the line from ‘asset sweating’ to ‘accounting manipulation’? Not Basel III’s fault, but I rather think we do expect exactly that.
Regulatory risk weightings are still a mess, with the ratings agencies still ensconced as the arbiters of credit quality.
Then of course there is shadow banking, which Basel III largely dances around. One particularly glaring example is the whole custody/client money/asset segregation/rehypothecation/title mess in London. There’s not a peep, burble or whisper here in the UK about the sort of legal reforms (somewhat in the manner of the US’s 1934 Securities Act, perhaps, plus a UK version of SIPC) that would sort this out. Recent Lehman-related rulings on Client Money actually mess the situation up even more. Of course, our obligingly vague 17th century line on “who owns what” works very capital-efficiently for Prime Brokerages. Which is a big part of why Mayfair now houses a $4Trillion shadow banking system. Push from Basel III would have helped get more of a grip.
I have nothing to say about enforcement; it’s been such a long time since I’ve seen any that I’ve forgotten what it is.
In the end, these and other regulatory arbs are all consequences of politics. Pending some unimaginable transformation there, in which regulators somehow acquire the discretion to pick fights with banks, Lex (with apologies for his English usage) tells it how it is
the reality is that a Basel III world will not look hugely different to the one from which the last crisis sprang.
One might think with reforms being such weak tea that financiers might just take the win. But as Das recounts below, they’ve instead decided to try at, and have succeeded in, extending their winning streak.
By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives(2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequence – Reloaded (2016 and 2021). His latest book is on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is an amended version of a piece first published on 20 August 2025 in the New Indian Express print edition
Stricter regulations, known as Basel III, introduced following the 2008 financial crisis to strengthen the financial system, are now being systematically weakened. Understanding how the regulatory ‘sausage’ is made provides insights into the problems.
Banks facilitate payments, accept deposits, provide credit and risk management tools. Deregulation and the drive for size and profitability has led banks to expand their activities into underwriting securities, insurance, asset management and trading.
The risk of banking is simple. Unlike funds, banks guarantee the return of deposits. Losses from loans or other activities can jeopardise their ability to meet obligations. High leverage (around 10 to 12 times) exacerbates this risk. Banking involves maturity transformation. Deposits have shorter maturities than assets meaning simultaneous large withdrawals create liquidity risk. Mismatches of maturities can expose the bank to interest rate fluctuations.
These risks can be addressed by less leverage with banks holding more capital, maintaining liquidity reserves and reducing maturity mismatches. Riskier activities, especially trading, can be restricted or supported by high levels of shareholder funds. Basel III’s attempts to do this were unnecessarily complicated.
Equity (now TLAC – total loss absorbing capital), which encompasses many types of securities, is supplemented by a separate leverage ratio. Capital calculations require often arbitrary and subjective differentiation between risks. Banks must meet a liquidity ratio and net stable funding ratio. For off-balance sheet instruments, like derivatives whose risks are difficult to estimate, there is a bewildering mix of central clearing, collateral and counterparty risk charges. Trading exposure is measured by complex formulas. Proprietary trading is theoretically restricted. Banks must prepare ‘living wills’ – a funeral plan for unwinding transactions in the event of failure.
As Basle is an advisory forum, the rules must be adopted by individual jurisdictions. This creates a lack of uniformity. Some countries now require multi-national banks to operate through appropriately capitalised local subsidiaries instead of branches. Rules are also adjusted according to size – GSIBs (globally systematically important banks) and DSIBs (domestically systematically important banks).
Whether the new system actually works is uncertain. The 2023 failures and resolutions of US regional banks and Credit Suisse required government intervention.
The causes of the dysfunction are straightforward. Banks wield significant power. According to Reuters, as at the end of 2023, 486 federal lobbyists were working on behalf of US banks with $50 billion or more in assets and seven trade groups spending $85 million. Campaign donations to political parties run into hundreds of millions.
The banking sector’s influence has strong foundations. With debt now central to economic activity, banks can unleash the potent threat that the availability of credit would diminish and its cost increase. Banks can rely on shareholders to support their objections. In The Bankers’ New Clothes, Anat Admati and Martin Hellwig suggested much higher equity levels for banks – 25 to 30 per cent of assets (common a century ago) to decrease the risk of failures and crises. This 2-3 times increase in share capital would lower returns and earnings. Share prices would drop perhaps by 30 to 50 percent – a loss of hundreds of billions or even trillions in market value globally. Stockholders would hardly welcome this loss of wealth.
Bank tactics in avoiding or diluting regulations follows a simple script. They begin by arguing for self-regulation because banking is too complicated for regulators to effectively understand or control. If this fails, then they push for an inquiry involving multiple hearings, submissions, draft regulations and comment periods. This incorporates the ‘salami slice’ tactic. You separate the issues and attack each sequentially meaning the process is slow. You aim to discredit even the most unobjectionable measures by association with more controversial elements. Lobbyists are skilled at obfuscation by switching between the entire package and individual components or sowing division between national regulators. Soon regulators have lost sight of purpose, drowning in incomprehensible detail, confusing jargon and acronyms.
If some regulation becomes inevitable, then lobbyists will helpfully draft proposed rules to assist under-resourced policymakers. The aim is to make the rules complex, either vague or excessively long with ambiguous exceptions and exploitable internal contradictions. This creates endless possibilities for interpretation and loopholes which can be used to continue business as usual. The rules restricting proprietary risk taking have exemptions for market making. Any self-respecting lawyer would be embarrassed if they cannot establish a client nexus to most trading to prevent application of the prohibition. New structures and products using loopholes present revenue opportunities for bankers.
Overly intricate regulations enjoy support from lawyers, advisors, compliance experts and consultants who benefit from detailed audit and oversight requirements. Regulators can justify higher salaries, more staff and greater resources to administer the new system. In effect, simple effectiveness is inconsistent with profits or power.
Everybody knows that information asymmetry impedes proper regulation. Regulators struggle to obtain the best talent meaning that they ill-equipped for the task. Moreover, junior staff use their stints at regulatory bodies and central banks as a springboard into more lucrative careers in banking. This diminishes their zeal in challenging potential future employers. Senior regulators and politicians are unlikely to jeopardise futures as directors or advisors to the banks they now regulate.
As time passes and the original reasons that prompted regulatory scrutiny, typically a crisis or failure, become more distant and fade from memory, lobbyists argue that things are fine, the conditions that caused the problems no longer exist. They contend that action is unwarranted or any tightening can now be reversed. Exhaustion sets in. Personnel turnover allows you to claim that the matter was discussed earlier, even if it wasn’t, and rejected.
Banks have used this precise approach to force regulators, especially in the US, to reduce the amount of capital required by banks by weakening measures such as the supplementary leverage provisions. Amusingly, regulators continue to assert that the banking system remains strong and resilient. That will be stress tested in the now brewing financial crisis. While taxpayers hope that they are correct, there is no assurance that the problems have been fully addressed and banks will pass that test.
The unacknowledged reality is that banks are utilities. Private ownership allows leveraged risk-taking underwritten by governments This unpriced insurance effectively boosts bank returns benefitting shareholders at the cost of all taxpayers. ‘Too-big-to-fail’ financial institutions exploit the fact that the prospect of citizens unable to make payments or withdraw cash would bring down governments and paralyse the economy.
