by Dr. Ellen Brow
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
Two years after the 2008 bailout, the economy continues to struggle with a
lack of credit, the hallmark of recessions and depressions.
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.
We are still trapped in that spiral today, despite massive “quantitative
easing” (essentially money-printing) by the Federal Reserve. The money
supply has continued to shrink in 2010 at an alarming rate.
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:
“The plunge in M3 [the largest measure of
the money supply] has no precedent since the Great Depression. The
dominant reason for this is that regulators across the world are
pressing banks to raise capital asset ratios and to shrink their risk
assets. This is why the US is not recovering properly.”
In a working paper called “Unconventional
Monetary Policies: An Appraisal”, the Bank for International
concurred with Professor Congdon.
The authors said,
“The main exogenous [external] constraint on
the expansion of credit is minimum capital requirements.” (“Capital”
means a bank’s own assets minus its liabilities, as distinguished from
its “reserves,” which apply to deposits and can be borrowed from the
Federal Reserve or from other banks.)
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.
Why Is the BCBS
Raising Capital Requirements
When Existing Requirements Are Already Squeezing
Concerns about the credit-tightening effects of Basel III were reported in a
Huffington Post article by Greg Keller
and Frank Jordans, who wrote:
“Bankers and analysts said new global rules
could mean less money available to lend to businesses and consumers...
“European savings banks warned that the new capital requirements could
affect their lending by unfairly penalizing small, part-publicly owned
“‘We see the danger that German banks’ ability to give credit could be
significantly curtailed,’ said Karl-Heinz Boos, head of the Association
of German Public Sector Banks.
“Insisting that French banks were ‘among those with the greatest
capacity to adapt to the new rules,’ the country's banking federation
nevertheless said they were ‘a strong constraint that will inevitably
weigh on the financing of the economy, especially the volume and cost of
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.
“‘These are regulations and burdens on bank
results that only make sense in times of monetary and credit expansion,’
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,
“were quick to praise the agreement and
insisted they would meet the required reserves in time.”
The larger banks were not worried, because,
“The largest U.S. banks are already in
compliance with the higher capital standards demanded by Basel III,
meaning their customers won't be directly affected.”
Their customers, of course, are mainly large
“Small businesses that rely on borrowing
from community banks,” on the other hand, “may be more affected... They
will try to make up for the higher capital requirements by lending at
higher rates and stiffer terms.”
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”:
“Indeed, on the day Lehman Brothers
collapsed, THEY would have been in compliance with the Basel III
Punishing Your Local
Bank for Wall Street’s Misdeeds
What precipitated the credit crisis and bank bailout of 2008 was not that
Basel II capital requirements were too low.
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.
The smaller local banks neither triggered the crisis nor got the bailout
money. Yet it is they that will be affected by the new rules, and that
effect could cripple local lending. Raising the capital requirements on the
smaller banks seems so counterproductive that suspicious observers might
wonder if something else is going on.
Professor Carroll Quigley, an insider
groomed by the international bankers, wrote in
Hope in 1966 of
the pivotal role played by
the BIS in the
grand scheme of his mentors:
“[T]he powers of financial capitalism had
another far-reaching aim, nothing less than to create a world system of
financial control in private hands able to dominate the political system
of each country and the economy of the world as a whole. This system was
to be controlled in a feudalist fashion by the central banks of the
world acting in concert, by secret agreements arrived at in frequent
private meetings and conferences.
The apex of the system was to be the Bank
for International Settlements in Basel, Switzerland, a private bank
owned and controlled by the world’s central banks which were themselves
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.