By Philippe Herlin -
Researcher in finance / Contributor
to Goldbroker.com
Incredibly, banks’ wishes have
come true in the very first week of 2013 ! Should we rejoice ? Well, not
really, because one of the main dispositions of Basel III, where prudential
norms of the world banking sector are being discussed, has been emptied of
its substance.
The crisis of 2008 has shown
that solvent banks that are short of cash could go bankrupt. A financial
crash can be lethal for a relatively healthy financial institution that is
short of cash : Money doesn’t move around, depositors empty their accounts
and the bank doesn’t have what it needs to simply keep operating. The idea
was to force the banks to have enough to « last » 30 days without
any access to the market, and have access to easily movable funds, even in an
extreme situation.
The Liquid Coverage Ratio
(LCR) was, from the start, to only take into account high quality and very
liquid assets like ECB deposits or State Treasury bonds. The banks argued,
and rightly so, that Treasury bonds, even the ones from large countries, did
not constitute an absolute guarantee.
But, utmostly, all those
frozen liquidities « just in case » didn’t please the banks,
because it represents a cost to them. So they threatened to restrict credit
to businesses, which already are struggling, submerged as they are by all the
newly imposed regulations... The result of this threat was that other assets
would be accepted as guarantee, namely stock shares and, please don’t laugh,
credit-backed mortgage securities. And, to top it all, the date of
implementation has been pushed to 2019 ! Needless to say, one of the most
needed dispositions of Basel III is dead.
But this attack on the LCR may
be revealing something more profound. Because, actually, the banks, along
with the regulators and the States in Basel, are probably saying to themselves
that, should such a crisis arise, the central banks would open the flood
gates of liquidities to avoid a severe cardiac arrest for the banking system
(a little akin to the ECB’s LTROs of Dec.’11 and Feb.’12 for a total of one
trillion euros). In other words, let’s not worry, let’s be happy, central
banks will come to the rescue if things go bad. Also, the ECB wishes to
oversee the european banks, therefore it will be very well informed, maybe
even before the banks themselves, so why worry ?
Thus, this international
prudential regulation notion is failing because of the limitless extension of
the power of the central banks. Those are no more simply the « lenders
of last resort », but rather the ultimate backstop of the whole
financial system. Well, actually, they think that they are... From now on,
the banking and monetary systems are more inter-connected than ever, without
any prudential norms and, finally, with no other tool than the printing
press. By kicking the can down the road with this crisis, we’re setting
ourselves for a much bigger one.