Relaxation of Basel III: how excited should we be?
January 8, 2013
The Twelfth Night Basel announcement of a relaxation of the original proposals for the Liquidity Coverage Ratio (LCR) is interesting for the non-financial sector on at least two counts. But on two counts also it is challenging to write about the topic.
At one level raising doubts about the smartness as well as the detail of Basel’s proposals is a little akin to challenging motherhood or respect for the flag; we surely all want a more robust banking system, less capable of such egregious failures of prudence and basic competence than we have persistently seen over the last decades and most dramatically so in 2007/08.
The very complexity of Basel III and to lesser extents its predecessors creates the other challenge. No need for references to rocket scientists; all must know that mastering the detail of bank capital regulation is not for the faint-hearted nor for those whose daily lives are not directly touched by the subject.
So why does the LCR announcement look interesting to this layman?
Firstly, on the purely practical level the changes ease some of the pressures that Basel III imposes on the corporate world, quite apart from everything else happening in the economy beyond the financial sector. No need to repeat here the mantras about sustainable employment and growth being driven by the real economy, with productive capital investment delivering multiplier direct and indirect benefits.
Stay with me and I will simply note that in calculating the LCR banks need no longer make the theoretical and academic assumption that committed facilities will be 100% drawn within a 30 day period; the ratio is reduced to 30%. Common sense, you might be saying, but for evident reasons Basel is unmoved by mundane common sense.
The change in the basis for the LCR, taken together with the move to a phased introduction of the requirement (from 2015 to 2019), will be significant for the ability of banks to lend to the non-financial sector. As such we should welcome the proposals.
The second reason to be interested in the Basel announcement is I believe what it tells us about financial regulators and especially Basel and its community of central bankers. I first became involved with the implications of Basel III when we realised that it threatened to cut across the value of the corporate exemption from the G20 proposals (which would have shifted all OTC derivative transactions onto exchanges and into central clearing). I was told that the tablets of Basel were indeed immutably in stone; and I was told that Basel was an eco-system populated by central bankers with a resolute determination to talk to their own and certainly not to the non-financial sector.
I won’t rehash the story other than to say that – to the European Union’s credit – our arguments on the deleterious impact of CVA were heard and we believe we are now moving to an outcome on the EU’s implementation of Basel III (through CRD IV and CRR) that is sensible and valuable for the real economy.
The reaction to the news on LCR suggests that Basel actually listened – if not to our voice then at least to that of the banking sector. Rather too late perhaps……but Basel listened and recognised the argument.
Finally, some open questions that are I assume exercising minds in Brussels. Did the Commission have any inkling of the plans to soften the impact of the LCR requirement? Are the Commission, Parliament and Council now thinking through where this leaves the detail – in CRR – of the EU proposals? What now might be the timetable for implementation of CRR?