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Banks’ Monopoly Capital and Basel 3

The new regulations on banks’ capital requirements known as Basel 3, made known to the public in mid-September, are a major institutional boost to the monopolistic position of the largest banks.1  In the new framework the capital that banks must hold against lending activities has been raised from a ratio of 2%, established by Basel 2 in 2004, to 7% of the so-called tier 1 capital, supposedly made of the hardest assets.  The new rules will come into effect on January 1, 2019.  Thank to the money received virtually free from governments, most of the big banks are already at the 7% ratio and beyond.  Therefore adjustments will fall mostly on the smaller institutions.  Mergers and further concentration are likely to follow suit.  As pointed out by John Kay on September 14 in the Financial Times, Basel 3 has created powerful barriers to entry strengthening the monopolistic positions of the large banks, which will operate under relaxed rules during the whole transition phase till 2019.  The collapse of the credit bubble in 2007 has shown that it is dangerously wrong to equate big with solid and safe.  In the United States, Britain, France, Belgium, and Switzerland, the crisis sprang from the big banks and from the largest financial companies.

In the Basel 3 rules the protective shield is to be effective at 7% of banks’ core capital.  It is measured by weighing equity against debt instruments and other risky assets.  Yet the whole history of financial crises shows that assets viewed as very safe see their value evaporate in no time.  In “normal” times it may appear possible to separate equity from debt and risky products.  However a financial crisis is precisely the tipping point of a systemic process where over a relatively short time the perceived “normality” is altered.  Stable “normality” does not exist, hence it is impossible to foretell what constitutes a safe asset.  Moreover financial speculation and instability is nested into Basel 3 rules as they allow banks to lend 33 times the amount of their tier 1 level.  This means that a drop of just a few percentages in asset values would melt the shield, causing bankruptcy.

On September 14, the BBC’s Robert Peston reported that the strongest opposition to tougher rules has come from France, Germany, and Japan.  France has even succeeded in preventing the highly generous 33 times lending limit from becoming compulsory for all banks.  At the London G20 meeting in the spring of 2009, Paris and Berlin strongly argued in favor of new stricter guidelines.  Their governments acted in a populist fashion for domestic consumption, but they also believed that their own banks were more capitalized than those of the United States.  Tougher rules, they thought back then, would give French and German banks a global advantage.  Since the London meeting, as the crisis kept unfolding, it has become apparent that French and German banks are full of toxic assets that they do not want to bring onto the books.  The recent stress asset test conducted by the European Union has ended up in a farce: several German banks actually hid the toxic products in order to pass the test.  Importantly the Bundesbank and the Berlin government covered up banks’ cheating by stating that the matter belonged to the länder (states).  On top of the traditional toxics made of derivatives, French and German banks hold large amounts of Greek, Portuguese, and Spanish treasury bills.  These have been turned into risky and fragile instruments by Berlin’s policy towards the Greek debt, which led to a sharp tightening of fiscal policies throughout the European Union.  Thus French and German representatives no longer want stricter rules but wish to let banks operate within a large grey area.  Basel 3 guidelines do not say anything serious on how to deal with derivative products, which keep multiplying and mutating still well off the books.

Basel 3 reassures the world’s monopolistic banks on two essential grounds.  No limit is set to the policy of short-term maximization of dividends and bonuses.  Furthermore, precisely because it strengthens the oligopolistic position of the largest units, Basel 3 practically institutionalizes the “too-big-to-fail” principle.  It follows that the free donation of public moneys to private banks will continue because crisis situations will not fade away.


1  The Basel 3 accord has been formulated by a committee working at the headquarters of the Bank of International Settlements located in the Swiss city of Basel.  The accords known as Basel 1, 2, 3 relate to attempts to define criteria protecting banks from financial crises.  Basel 1 was formulated in 1988 in the wake of the Mexican crisis, Basel 2 criteria — hailed as foolproof — came in 2004 after the Asian, Brazilian, Argentinean, and Russian crises of the late 1997-2000 as well as in connection to the ensuing “bad” loans to East Asia by Japanese banks.  “Foolproof” Basel 2 lasted barely 3 years and prevented nothing since most of the banks’ speculation and consequent shenanigans happened with off-the-books derivatives.

Joseph Halevi is Senior Lecturer of Political Economy at the University of Sydney.  A version of this article will be published by Il Manifesto.

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