September 18, 2010n
The stock market shot up on September 13, after new banking regulations were announced called Basel III.
Wall Street breathed a sigh of relief. The megabanks, propped up by generous taxpayer bailouts, would have no trouble meeting the new capital requirements, which were lower than expected and would not be fully implemented until 2019.
Only the local commercial banks, the ones already struggling to meet capital requirements, would be seriously challenged by the new rules. Unfortunately, these are the banks that make most of the loans to local businesses, which do most of the hiring and producing in the real economy.
The Basel III capital requirements were
ostensibly designed to prevent a repeat of the 2008 banking collapse, but
the new rules fail to address its real cause.
Why Basel III Misses the Mark
Credit (or debt) is issued by banks and is the
source of virtually all money today. When credit is not available, there is
insufficient money to buy goods or pay salaries, so workers get laid off and
businesses shut down, in a vicious spiral of debt and depression.
In an article in The Financial Times titled “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard quoted Professor Tim Congdon from International Monetary Research, who warned:
In a working paper called “Unconventional Monetary Policies: An Appraisal”, the Bank for International Settlements (BIS) concurred with Professor Congdon.
The authors said,
The Bank for International Settlements (BIS) is “the central bankers’ central bank” in Basel, Switzerland; and its Basel Committee on Banking Supervision (BCBS) is responsible for setting capital standards globally.
The BIS acknowledges that pressure on banks to meet heightened capital requirements is stagnating economic activity by stagnating credit. Yet in its new banking regulations called Basel III, the BCBS is raising capital requirements. Under the new rules, the mandatory reserve known as Tier 1 capital will be raised from 4 percent to 4.5 percent by 2013 and will reach 6 percent in 2019.
Banks will also be required to keep an emergency
reserve of 2.5 percent.
Juan Jose Toribio, former executive director at the IMF and now dean of IESE Business School in Madrid, said the rules could hamper the fragile recovery.
For smaller commercial banks and public sector banks (government-owned banks popular in Europe), the credit-constraining effects of Basel III are a serious problem.
But larger banks, said Keller and Jordans,
The larger banks were not worried, because,
Their customers, of course, are mainly large corporations.
If the big banks that brought you the current credit crisis can already meet the new requirements, what exactly does Basel III achieve, beyond shaking down their smaller competitors?
As David Daven remarked in a September 13 article called “Biggest Banks Already Qualify Under Basel III Reforms”:
It was that banks found a way around the rules by purchasing unregulated “insurance contracts” known as credit default swaps (CDS). The Basel II rules based capital requirements on how risky a bank’s loan book was, and banks could make their books look less risky by buying CDS. This “insurance,” however, proved to be a fraud when AIG, the major seller of CDS, went bankrupt on September 15, 2008.
The bailout of the Wall Street banks caught in
this derivative scheme followed.
Professor Carroll Quigley, an insider groomed by the international bankers, wrote in Tragedy And Hope in 1966 of the pivotal role played by the BIS in the grand scheme of his mentors:
The BIS has now become the apex of the system as Dr. Quigley foresaw, dictating rules that strengthen an international banking empire at the expense of smaller rivals and of economies generally.
The big global bankers are one step closer to global dominance, steered by the invisible hand of their captains at the BIS.
In a game that has been played by bankers for centuries, tightening credit in the ebbs of the “business cycle” creates waves of bankruptcies and foreclosures, allowing property to be snatched up at fire sale prices by financiers who not only saw the wave coming but actually precipitated it.