New Basel Rules Could Punish Wrong Banks

The new Basel rules for bank capital requirements are aimed at making the financial sector safe. But quadrupling the percentage of capital banks have to hold on to in a system that is basically the same as the one governing global finance during the bubble and great recession isn’t the way to prevent future excessive risk taking. Instead, rules should find ways to force banks to take responsibility for their own risks. Why? Because the current framework for capital requirements runs serious risks of negative unintended consequences. Jacques de Larosière explains in the Financial Times:

But such “re-regulation” can have unintended consequences. It could encourage a transfer of heavily taxed operations in terms of capital requirements, such as trading, to the so-called shadow banking system, outside the scope of regulation and supervision. Such shifts may endanger financial stability unless current re-regulation is accompanied by new regulatory and supervisory structures for “non-banks”. Efforts in this respect are under way but they are still at the project stage, and will take time.

If banks had to take responsibility for their own risks it wouldn’t matter where the risks are at. But if they just have a number to worry about and bailout behind them, then its just a matter of fancy accounting. Next:

The second big cause for concern touches specifically on European banks and their business model. The new Basel capital and liquidity rules would, in the medium term, lead to reduced profits and increased competition regarding the generation of deposits. This inevitable rise in costs would have to be offset by higher productivity and, no doubt, higher costs for banks’ clients. Under pressure from extended competition, certain banks will be encouraged to operate in a way that is more profitable but at the same time more risky.

See the rest of the FT piece here.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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