The Corporate Law Group

Basel II-Much


The Basel Committee on Banking Supervision was supposed to suggest guidelines that would make international banks safer, more depositor trustworthy, etcetera, etcetera, etcetera. The fundamental objective of the Committee’s work was to revise the 1988 Accord (Basel I) and develop a framework that would further strengthen the soundness and stability of the international banking system while maintaining sufficient consistency that ‘capital adequacy regulation’ (read “state protection”) will not be a significant source of competitive inequality among international banks. In other words disallow one country from letting their banks accept more risk. In crafting Basel II, the Committee said that it believed that the revised framework (which adopted three ‘pillars’: minimum capital requirements, supervisory review, and market discipline) will promote the adoption of stronger risk management practices by the banking industry. The bankers themselves felt that Basel II would benefit those banks with better risk management metrics. Now, after years of work, there is some thought that Basel II prescribes exactly the wrong thing for a recession. Basel II requires higher and higher safety margins as portfolios are found to be more and more risky. The result is that banks are tightening credit at exactly the time when credit itself is seen as being too tight. As our government hands back 67 cents in the form of a stimulant (of course, after taking a dollar of your tax money) and begging you to spend it quickly, the banks are telling you that your loan will not be renewed. Maybe all that the government hand outs will go toward paying down debt. Not necessarily a bad thing for economy but certainly not what the wonks in the Wash. intended. We say that the law of unintended consequences trumps all, which is why a little humility from those who think they control anything, would be a good thing.
Paul Marotta

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