Monday, January 7, 2013

Banking: business as usual

by Michael Roberts

It's back to business as usual for the global banking system.  After years of deliberation and lobbying by international banks, the Basel Committee on Banking Supervision, headed by outgoing Bank of England governor, Mervyn King,  has announced its rules on global banking to ensure that a banking crash as was experienced between 2007 and 2009 cannot happen again.  And what has the Basel Committee (representing 27 financial centres around the world) come up with?  A so-called liquidity coverage ratio (LCR) that is supposed to provide a benchmark to ensure that banks have enough cash and liquid assets to cover any collapse in the value of assets or loans that the banks have on their books.

The LCR  is in addition to higher minimum capital ratios that the banks must have (more equity investment relative to loans and risky investments).  But the Basel Committee's final proposal just gives everything away to the banks.  Apparently banks can still buy 'toxic' assets like mortgage-backed securities and corporate stocks and call them safe investments and the amount of liquid (easily sold) assets like cash that the banks must hold has been sharply reduced from original proposals.  And the LCR does not need to be met fully until 2019!  Who knows what state the world economy and the banking system will be by then.

As one banking analyst put it:  “This is quite a lot more favourable to the industry than I and the market were expecting. The changes to the asset definitions and the outflow calculations in particular look like a fairly massive softening of approach."   The conditions have been watered down so much that most international banks meet the LCR and capital ratio targets already.  The Basel Committee has merely endorsed where the banks are now.  But it has given those banks that do not meet the targets yet another seven years to do so.  So the risk of financial collapse has thus not really been reduced.  Indeed, the banks are already getting back to their bad old ways.  In 2011, banks increased their investments in junk-rated stocks and bonds by 74%, while holding down lending to companies the need finance for investment or households needing mortgages.

Matt Taibbi in an excellent Rolling Stone article ( summed the way the banks have been bailed out massively by taxpayers round the world, driving up government debt ratios to post-war highs.  As Taibbi says, politicians and bankers colluded to lie about the size of crisis to begin with; then they lied about the size of the bailout needed; then they lied about how the bailouts would restore bank lending to households and corporations; then they lied about how healthy the banks were; then they lied about reducing the top bankers' bonuses; and then they lied by saying any bailout would be temporary.

Capitalist states committed their electorates to providing a permanent guarantee that banks will be bailed out and supported whatever - and the banks remain in private hands.  "All of this - the willingness to call dying banks healthy, the sham stress tests, the failure to enforce bonus rules, the seeming indifference to public disclosure, not to mention the shocking lack of criminal investigations into fraud by bailout recipients before the crash - comprised the largest and most valuable bailout of all" (Taibbi).  To which I could add the ensuing scandals revealed in the Libor rate fixing; the laundering of Mexican cartel drug money; the breaking of sanctions against Iran; and the mis-selling of  personal pensions and insurance (see my previous posts, and

And now we have the Basel Committee basically agreeing to allow the banks to resume 'business as usual' in return for which they must meet some minimal standards of probity by 2019.   No wonder Taibbi sums up the whole outcome of bailing out the bankers, as building a " banking system that discriminates against community banks, makes 'too big to fail' banks even to 'bigger to fail', increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments rather than to compete for small depositors."

So no change there then.

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