Quietly, with no fanfare and no headlines, the banks are steadily chipping away at the measures, meagre and delayed as they already are, designed to prevent another global financial crash. First, the capital adequacy ratios – the financial reserves that have be held to prevent or absorb any run on the bank that might develop – have been drastically weakened as a result of bank lobbying behind the scenes. At the time of the great crash of 2008-9 the level of tier 1 capital that had to be held in relation to a bank’s total risk-weighted credit exposures stood at 2.5%, which is fatally low. The new Basel III level set by international regulators in 2011 (revised slightly in June 2012)was still only 4%, well short of the 7% or even 10% demanded by reformers. Thus it took 4 years after the crash for even the slightest (and inadequate) tightening of the rules. However, worse was to follow.
The pusillanimity of the new capital reserve requirements was accompanied by almost unbelievable procrastination. It was decided that the new rules would not apply till 2019, as though the risk of a fresh crash could attend upon the convenience of the bankers. As if this was not bad enough, Osborne, desperate to get the banks lending to industry to re-start growth, conceded to the banks that the ratio would be reduced from 4% to 3%, thus reopening the very real risk of another disastrous run on a weak bank. The banks, true to form, responded to this inordinate and dangerous concession by increasing their lending to industry virtually not at all. To cap it all, the capital adequacy ratio isn’t anyway fit for purpose by itself since under the Basel reform proposals it wasn’t combined with a leverage ratio which (unlike capital adequacy formulae) really would predict the probability that a bank would fail.
Last month the rules were weakened further. The so-called liquidity coverage ratio – the second arm of the Basel III reforms requiring banks to hold enough cash and easy-to-sell assets to enable them to survive a short-term crisis – was softened by allowing them to hold a wider (and easier) variety of liquid assets towards their buffers and also by changing the calculation methods in ways that significantly reduce the liquidity buffers that have to held.
Now even the ring-fencing itself between the retail and investment arms of banks, as proposed by the Tory-commissioned Vickers report, is being seriously threatened. This UK report, which is still be implemented nearly 6 years after the crash, was reinforced by very similar recommendations of the EU Liikanen report last October. However, it’s not as though ring-fencing is anyway an adequate solution. Ring-fences (as opposed to a clean statutory break) are just too porous that can end up more like a string vest, a loophole which can easily be turned by City tricksters into a bolt-hole. Nevertheless that still hasn’t stopped the bankers demanding that ring-fencing is a step too far and should be quietly abandoned. Are the regulators and politicians utterly spineless?