Basel III rules relaxed: Banks got it all but become more prone to crisis

Bank of International Settlements buildingAeschenplatz 1, Basel, Switzerland.

Bank of International Settlements building
Aeschenplatz 1, Basel, Switzerland.

The European Commission through the most competent lips of its member, Michel Barnier, responsible for Internal Market and Services rushed to endorse the new unbelievably generous concession to banks all over the developed world.

This time it was the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision who did the favour to banks. This group of central bankers decided to relax the minimum Liquidity Coverage Ratio (LCR), increase the liquidity estimate of all bank assets and give four more years to banks to comply. In comparison Greece, Ireland and Portugal were given only two more years to zero their deficits.

This new decision was the best an investment banker could ask from the authorities.  He or she can now start play again with our money and if the bet comes true, he or she wins, if the bet turns sour taxpayers pay bill. But let’s look more closely to what has now changed in Basel III rules.New Basel III rulesWhat happened in Basel is very simple. The same people who had introduced in 2010 the Basel III strict rules, for banks to secure higher liquidity levels so as a new credit crunch like the 2008 one should never happen again, now are relaxing those standards. As from 6 January the Basel III rules contain as integral part the amendments to the Liquidity Coverage Ratio (LCR) as a minimum standard.

The Amendments introduce lower minimum liquidity levels, so as banks can spin faster the deposits bestowed to them by unsuspecting citizens and make the repetition of a credit crunch more plausible.At this point it must be reminded that the 2008 credit crisis, which was triggered by the bankruptcy of Lehman Brothers in September 2008, revealed that all rules for prudent banking had been removed during the preceding ten years and banks were freed to invest other people’s money to whatever risks they chose. The more risky those investments were the more profits and lucrative bonuses bankers and bank owners put in their pockets.

At some point however risky investments go bust, as it happened in the US real estate market in 2007, a catastrophe that send the world into the more dangerous credit crisis after the great crash of 1929.This time however major banks become “systemic”, meaning they cannot go bankrupt and developed societies are practically taken hostages to their services. As a result all the developed world governments in US, Europe and elsewhere had to use taxpayers’ money to recapitalise the “systemic” banks which could not any more die. They became…undead.

Old Basel III rules

Civilised societies however could not go on being hostages to the “systemic” banking conglomerates and under the pressure of citizens, governments and the monetary authorities decided to re-introduce strict rules on what banks can do with our deposits.

In short, in 2010 a special group made up of all central bankers of the developed world gathered under the auspices of the Bank of International Settlements in Basel and agreed to re-introduce tough rules on the standard liquidity coverage that banks should maintain, in order to be able to counter a crisis. This was not an easy task for banks. Practically they were all of them bankrupt and many continue in that state, despite the free capital they received from taxpayers and the zero cost loans from central banks. On this last point it must be noted that the banks receive loans at zero interest rate from central banks and they simply lend to us this money at 11% to 15%.

In any case under the initial Basel III decision, the banks were given until 1 January 2015 to attain the new higher liquidity minimum ratios. There were also provisions on how liquid their assets are. For example a loan to a not so trustworthy borrower doesn’t count as a very liquid asset, despite the fact that the lending bank by taking this risk increases its profitability. After all, the money belongs to the depositor not the lender. It was exactly this risky behaviour by banks that Basel III was supposed to refrain and reduce drastically, so as a new credit crunch becomes less probable.

The more prudently however a bank behaves the less profits it registers in its ledgers and fewer bonuses the management gets. In view of this prospect of less profits the management and shareholders of “systemic” banks, knowing that in a way they are in control of the game holding the modern economies as hostages to their services, have seemingly exerted strong pressures on decision makers to relax the strict Basel III rules, so they can move “more freely” and resume their risky practices.

And relaxed are now those strict Basel III rules. Not only the banks are given four more years until 1 January 2019 to reach higher liquidity standards but also those standards are corrupted and lowered. The adopted amendment increases the liquidity of all banking assets, thus making easier for bankers to reach the minimum required liquidity levels. In reality the new rules are so favourable to banks that a lot of people in the real economy were quite astonished. The difference is that in the real economy people, workers and businessmen alike, sweat for their earnings while bankers just play around with our money and if they win the profits belongs to them, if they lose the taxpayers pay the bill.

It was exactly this that this pompously named committee “Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision” of the Bank of International Settlements did.

Going back to Brussels so much impressed and happy was Michel Barnier by this decision, that the press release issued by his office concludes like this, “the texts on the table now of the European Parliament and Council should be adopted shortly, hopefully in the coming weeks”. He is really pressed to serve the banks…

O tempora o mores, banks have so much money to spend on…public relations!

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