Whiffing in Basel
My vote for the best coverage of the new Basel III capital requirements goes to the Zero Hedge blog, which called them out for what they are:
[T]his is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds of billions or even more than a trillion – each – off balance sheet without no clean accounting for the value of the alleged “assets”, and they both are and do.
Zero Hedge raises some great critiques of the standards, and collates various other valuable opinions, so I don’t want to rehash what was published there. I will, however, spotlight what I consider to be the biggest whiff in Sunday’s agreement: no leverage ratio.
After capital ratios, the Bank for International Settlements set leverage ratios as the next priority for Basel III.
According to the December 2009 consultative document on “strengthening the resilience of the banking sector,” essentially the blueprint for Sunday’s deal, BIS said that:
[T]he Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. This will help contain the build up of excessive leverage in the banking system, introduce additional safeguards against attempts to game the risk based requirements, and help address model risk. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for any remaining differences in accounting. The ratio will be calibrated so that it serves as a credible supplementary measure to the riskbased requirements, taking into account the forthcoming changes to the Basel II framework.
Capital is nice, but the leverage ratio is the money shot. Without it, BIS shot a blank on Sunday. BIS says it will start working on the leverage ratio in 2013, with no definitive release date set. That’s just a travesty. Or, as Zero Hedge puts it, “political theater.”
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The WSJ offers this valuable breakdown of which banks will require additional capital under Basel III.
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