To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored: withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former. The world needs a smaller and safer banking industry. The defect of the new rules is that they will fail to deliver this.
Am I being too harsh? “Global banking regulators . . . sealed a deal to . . . triple the size of the capital reserves that the world’s banks must hold against losses,” says the FT. This sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much.
The new package sets a risk-weighted capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of 2.5 per cent. Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses. So the rule sets an effective floor of 7 per cent. But the new standards are also to be implemented fully by 2019, by when the world will probably have seen another financial crisis or two.