Pulling the Basel III teeth

Capitalism needs bubbles to keep itself afloat

Draft

Today international financial regulators came together in Basel to re-adapt, soften the Basel III rules. The Basel III rules had been agreed by the G20 in the aftermath of the crisis to avoid a new “Great recession” in the future. These Basel rules would be implemented from 2013 until 2018. Their main objective was to limit the amount of risks of bank investments. As a bank asks deposits of people and invests this loaned money in the economy – through credit-lines, investments or loans – it takes the risk that these loans are not paid back and gets a (high) profit in return. In order to ensure that the deposited money is paid back to the people having deposits (bank-accounts), it needs a buffer to compensate possible losses. This buffer is the so-called capital base or the “own capital” of the share-holders. The Basel-agreements state which capital can be seen as “own capital” and how high this buffer should be.  This buffer limits the amount of risks and investments a bank can make.

A very simplified example could be like this: If capital requirements would be of 10% of Tier I capital (in its current definition), this would for example mean that a bank need 1 billion dollars invested by its shareholders, to ask 9 billion of saving-accounts, in order to invest 10 billion dollars. If those 10 billion would create a profit of 10%, the bank would get 1000 million, of which it had to give 180 million to the deposit-holders (at 2% interest). This would mean that the bank would make 820 million dollar profits for an invested capital of 1 billion, or 82% a year. – If however the economy is going bad, and a bubble bursts, these 10 billion make losses 5% for example, only 9,5 billion remains. Deposit-holders (9 billion) and their 2 percent interests (180 million) have nevertheless to be paid back, so only 320 million remain of their initial 1 billion profits. If the losses would be 10% or more, they would have losses of 1,180 million on their 1,000 million invested and the bank would go bust… 

How higher the capital buffer, the less risk the bank has to go bust. Bank default risks the creation of global financial catastrophes, particularly, if all banks have big losses as a consequence of “systemic risk”, a global economic downturn or capitalist recession, destroying the “financial stability” of the system and requiring state-intervention at the cost of the taxpayers, as we have seen in 2008.  In the months following the biggest financial crash ever, the global political and industrial elite, showed the intension of being hard on the financial elite, as their “casino-capitalism” was ruining their real political economy with their risk-taking. The G20, lead by Sarkozy, made agreement on tougher regulation, as the soft regulation was seen as the cause of the crisis. These negotiations between states and financial regulator lead to the agreement of the new Basel III agreements, which had always been harshly opposed by the global financial elite. These argued that stronger regulation would endanger the recovery from the crisis, as it would cut the available money-supply for investing in the economy and provide purchasing power.

As a matter of fact, both were right. No extra regulation would mean a big risk to the stability of the system. Extra regulation would have a negative impact on growth, and provoke a possible depression. This contradiction is an expression of the contradictions within capitalism itself. The contradiction was trespassed temporarily in 2011, through the development of harsher rules of Basel III, on capital requirements for example – though still very liberal in comparison with the regulation during the Keynesian Bretton-Woods age, and before the introduction and development of neoliberal financial liberalization and globalization, as well as the development of the battery of complex structured financial investments as we know them now – but with an agreement to implement them only over time; concretely, the first measures would be only implemented from 2013 and finished in 2018.

Now, in 2013, when the first regulations would begin to be implemented, they are already softened. What could already be predicted in 2011, that the new regulations would be only window-dressing proves to be right. You cannot make regulations more strictly, when the world economy risks being re-thrown in a recession. At the same time, the financial world is already back again on its ancient track. Financial risks have never been greater, as recent OESO pointed out in its analysis of the European bank sector this week… but weak regulations, monetary financing by the ECB, the rescue packages of the FED, the billions of the European troika to save the European banks, etc… have also brought profits back to pre-recession hights. The music is playing again, the bubles and balloons are back for the party… and "as long as the music is playing, you've got to get up and dance," as Prince, the former CEO of citibank said in 2007, months before the crash of Bear Stearns and IAG.

As in 2007, everyone involved can see that if there would be a recovery – ‘recovery’ is a bad worth for a weak contention of a deep recession due to the Euro-crisis and a new banking crash – this recovery is fictitious, as unemployment is still rising, purchasing power is decreasing and government finances of most countries are not really healthy. Since the 1970’s capitalism has delt with its structural over-production crisis trough debt-financing of consumption, through financial liberalization. In order to keep consumption and accumulation growing it created an immense financial sphere, with financial titles that are totally disattached from the real economy and are no more than virtual value-forms. It needed these instruments to keep up its growth and restore its profits during the last 30 years: Capitalism needs the bubbles to keep itself afloat.

This is de reason why the Basel III agreements have been softened, and why a new financial crisis probably will not take long to emerge.