New Basel 3 Capital Requirements Not Enough To Prevent Another Crisis

    The WSJ has an article which gives a few hints of what we can expect from the new Basel 3 capital requirements for banks. From early indications they are likely to be a failure.The problems of Too big To Fail and too much leverage in the banking system go unresolved (why should they be solved when the taxpayers are backstopping you). From the WSJ:

Heading into the weekend, the discussions focused on requiring banks to hold basic levels of capital known as "common equity" equal to at least 7% of the bank's assets. This would be up from a 4% threshold imposed on U.S. banks after the 2009 stress tests.

The 7% component is expected to include a 2.5% "conservation" buffer of capital. If capital levels at a bank dipped below this buffer it could face tighter restrictions on its dividend and executive compensation policies.

Banks will be allowed to phase in these new standards over a period of years so banks will have more time to comply. For example, banks will be required to hold common equity at levels equal to 3.5% of their assets by 2013, 4% by 2014, and 4.5% by 2015.  

   Well, the banks are going to be happy with these "tough" new requirements. I bet the 7% requirement does not even apply to off-balance sheet transactions so it will probably give banks an incentive to move more assets off the balance sheet. I really love the bit about restrictions on executive compensation if capital levels dip below the requirements. The bank CEOs will have to accept total compensation of $43 million instead of their usual $60 million--poor things. A real solution would be to dramatically increase Tier 1 capital levels to 20% (excluding goodwill), including all off balance sheet transactions. But of course this would severely hurt the profitability of the banks and turn them into boring companies like utilities (a good scenario). So in the end nothing will change and in 10 years we will have another crisis and politicians will ask why it was not prevented by the Basel 3 requirements. No problem the taxpayers will pick up the bill for another 2-5 trillion to bail out the banks. Wash. Rinse. Repeat.

Black Swan Insights

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New Basel 3 Capital Requirements Not Enough To Prevent Another Crisis