BASEL III in USA - will it make any difference?

 

Whilst Federal Reserve may be confused as to when to withdraw stimulus (i.e. QE), it seems that they do not have much confusion on what to do with Basel III.

 

They have decided to adopt tougher requirements for bank balance sheets under Basel III.

 

The rules are purportedly designed to prevent another financial crisis - however, it may be a tall claim. Basel II when launched during early 2000s, it was acclaimed as revolutionary. Well it ended up creating wrong revolution as it made banks' credit / lending pro-cyclical and gave unnecessary prominence to External Credit Rating agencies. So we have to wait and see whether Basel III fulfils the claims its creators currently make.

 

Well it looks like Basel Accords are predominantly created mainly by economists. More bankers must be involved at the design stage itself.  Basel III rules are supposed to make it more expensive to be a very big bank while going easier on small and medium-size institutions. They don't realise Big Banks are smarter and can convince the regulators how strong they are - For example, just before bankruptcy, Lehman was in full compliance with Basel II regulations and complied with capital adequacy norms!!

 

The reckless lending led to subprime bubble and its burst resulted in worst banking crisis since the Great Depression of 1929.  The federal government launched an unprecedented bailout that pumped about $700 billion into the U.S. financial system. The US Government is still saddled with issues related to the 2008 Credit Crisis - QE related problems, being one of them.

 

The time frame to comply with rules is rather relaxed - the banks must meet a new minimum capital requirement within 5& half years - it means the banks need to comply it by 2019 or even 2020, given the possible extensions, we can expect from the regulators based on the requests from banking sector. 

 

One of the key rules is that the banks have to hold at least 7% of RWA (risk weighted assets) in high-quality capital, such as common stock and retained earnings. Well it is not the capital adequacy that prevents bank collapses –the way the credit risks are analysed and managed is more important.

  

Fed officials made a big statement that they will introduce tougher rules on the nation's largest banks - well it seems to be a joke because, when JPMorgan Chase & Co. didn't provide much detail about its USD 5 billion derivative loss a few months back, Fed let them go without any significant action. When the law makers asked the CEO & Chairman of J P Morgan  - Jamie- a few questions, the answers were not only as murky as the deal; instead Jamie smacked arrogance in his replies (it shows the age old principle in action "attack is the best defence'.) The banks which accept deposits from public still play high risk games, especially the large ones such as JP Morgan - this casts doubt whether new standards, part of the so called Basel III will make any real difference.

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http://www.amazon.com/Advanced-Analysis-Management-Finance-ebook/dp/B00CJ9FVGS