Is it all over for Basel 3.1 (or what is known in the United States as the “Basel Endgame”)? Should we kiss goodbye the Basel Committee and the very idea of global banking-supervision accords that establish minimum capital requirements? Many informed people think so. The committee’s recommendations have long been assailed from all sides, especially the western shores of the Atlantic.
In 2023, emboldened – or perhaps stung – by the failures of Silicon Valley Bank and a few other mid-size institutions, the US Federal Reserve proposed a tough interpretation that would have increased capital requirements for American banks by 19%, on average. But pushback from the financial industry, led by Jamie Dimon of JPMorgan, was fierce, with Super Bowl halftime commercials warning Americans that small firms and middle-class households would pay the price for such a policy.
So the Fed backed off, reconsidered its position, and devised new proposals that would have halved the impact of its original recommendations. But these watered-down measures are also in doubt. Even before Donald Trump’s impending return to the White House had raised the possibility of changes in personnel, the Federal Deposit Insurance Corporation was signaling that it would not back them.
Meanwhile, those who oppose any foreign entanglements that could tie up the US financial system have been emboldened. Steve Forbes, of the eponymous magazine, argues that, “One of the first tasks of the Trump Treasury Department should be to abandon the Basel regime of banking regulations.” And Gene Ludwig, a former comptroller of the currency, has suggested that “the Basel endgame rule could be completely dead.”
Nor is the climate for rule-makers much more favorable in Europe. French President Emmanuel Macron has told the European Commission that, faced with this American backsliding, it needs to rethink its Basel 3.1 implementation plans: “[the EU] cannot be the only economic area in the world that applies [it].” With European banks losing market share in Europe to the Americans, the issue has become politically sensitive.
Even the Bank of England is under pressure. It played a key role in launching the Basel Committee back in the 1980s, and it normally sticks closely to the agreements reached there. But Britain’s new Chancellor of the Exchequer has argued that regulators should be doing more to promote competitiveness and growth. Further increases in bank capital, especially for lending to small businesses, are hard to reconcile with that objective.
The Basel Committee’s new chair, Erik Thedéen of the Swedish central bank, has his work cut out for him. Can he keep the show on the road? One problem is that there is very little international agreement on the facts. You would think that the simple question of whether US banks will be as well capitalized as EU banks after the implementation of Basel 3.1 would have a straightforward answer. But that is far from the case.
US banks think that the Fed’s proposals would put them at a competitive disadvantage, whereas Macron thinks the opposite. European banks regularly point to a 2023 Oliver Wyman report showing that big EU banks have a Common Equity Tier 1 ratio (the main comparable measure of bank capitalization) more than three percentage points above that of their US counterparts.
But the plot has thickened. The Financial Times reports that the European Central Bank’s own research comes to the opposite conclusion: “capital requirements for big EU lenders would rise by a double-digit percentage if they had the same rule as their large Wall Street rivals.” Unfortunately for those who seek the truth, the ECB is split on whether to publish its paper, which remains under wraps in Frankfurt. The political awkwardness of the situation is obvious.
It is surprising for a process that began just after the global financial crisis to have reached an impasse at such a late stage. The core provisions of Basel III were first published in November 2010, after a very rapid work program, and the latest iteration was presented as a mere “tidying up” exercise. But it is proving more contentious than the main accord.
Part of the problem is that the political impetus for reform has waned. The driving force was the G20, which forced regulators to move fast and break things after the crisis. But we heard very little about Basel at the group’s summit in Brazil this month. Apparently, the financial crisis is being consigned to history.
This is unfortunate, and regulators will undoubtedly say that reports of Basel’s death have been much exaggerated. But unless the patient receives urgent attention, he may well expire. Sooner or later, countries that have already implemented the new rules – such as Australia and Singapore – will begin to cry foul, whereupon the process could unravel entirely.
In any case, the US, the European Union, and the United Kingdom will be obliged to call a time-out over the northern winter. The US will have a new Treasury secretary, Scott Bessent, and the EU a new commissioner for financial markets, Maria Luís Albuquerque. Both will need to get settled in. But they also will need to get together soon. The stakes are high, and the situation resembles Samuel Beckett’s Waiting for Godot more than his Endgame. Godot had better turn up soon.
Howard Davies, a former deputy governor of the Bank of England, is Chairman of NatWest Group. Project Syndicate, (c) 2024, published here with permission.
1 Comments
PREPARATIONS FOR A NEW GLOBAL FINANCIAL REALITY
I missed this article until this morning and was astonished to see that there was not a single response to it - despite the subject matter being of such landmark importance.
Indeed this is all about the coordination of the global central banking cartel, its very survival, and by extension the survival of the entire globally entrenched fiat currency system itself.
ALL fiat currencies are credit, not money - they have outlived their usefulness. I remain convinced that they will self-destruct - especially now since the Basel III re-allocation of physical gold as a Tier 1 balance sheet asset – in essence, this act heralds the fact that all fiat currencies are being unceremoniously thrown under the bus.
So too, there is a total rift now between the BIS, their 62 member CBs, and notably, of course, dah Fed – they no longer cooperate in manipulating the market price of physically deliverable gold bullion to disguise the appalling purchasing power of all their national currencies.
That is in itself the end of the massive con that has lasted for more than 50 years. It also took the form of the petrodollar scam once all currencies effectively became fiat from 1971 onwards and when the gold standard failed so spectacularly when De Gaulle challenged the legitimacy of the U$, in using the Bretton Woods architecture to effectively sell endless dodgy debt.
I remain equally surprised that I seem to be the only commentator around who publically decares this Basel III move as the most significant global financial event since the Fed was concocted 111 years ago.
A NEW PARADIGM IN GLOBAL RESERVE CURRENCY MODELS
The situation is coming to a head now that China is painfully aware that a hybrid war with the U$ is already full on, and that a hot war is being openly and explicitly planned by the flailing U$ hegemon.
The Chinese know that dollar-denominated assets are becoming increasingly risky for a multitude of reasons, but with the caveat that sudden divestment, as opposed to stealth, would be an irresponsible destabilisation of the global financial architecture that would not benefit any of the parties involved.
What has transpired now is a situation where China can use the U$ dollar for capital control, but principally in the context that it too is a tool to be deployed as the new global financial architecture takes shape.
China has moved hundreds of millions of dollars out of Western financial systems and banks, and into its domestic institutions. This is extremely messy though, when China consistently earned billions of worth of extra dollars every month from their current trading account.
THE WESTERN NARRATIVE - how vulnerable the Chinese economy is - Yeah right!
Brad Setser, a senior fellow at the U$ Council on Foreign Affairs, is saying that China needs to provide more information on investment income from FDI (Foreign Direct Investment) - IOW on investments, bonds and bank loans.
Why would they show their hand? - especially when the U$ has effectively declared financial war on them, and now that it is all set to be ramped up massively by Trump signalling his idiotic tariffs* - all of this is tragically reminiscent of the Smoot/Hawley debacle from the era of the Great Depression, where this strategy contributed to a 70% reduction in global trade.
*(Trumpster declared the word 'tariff' as his favourite in the entire English language - seemingly even eclipsing 'bigly' and 'warp-speed' !)
China has maintained a tight trading band for their yuan against the U$ dollar, but now it appears that they hold around $700 billion more in trade reserves than they admit to. This surplus is growing by the day as they run a daily trade surplus of around #1 billion per day - so much for how 'badly' (sic) the Chinese economy is doing!
All of the distrust of the U$ hegemonic status quo went onto steroids when they effectively stole all Russian dollar-denominated assets held in Western banks - there could be no clearer signal, that if a country doesn't want to be victimised for pursuing genuine economic sovereignty, then they needed a completely new strategy - QUICKLY!
As tranches of U$ treasury bonds mature, they now collect the face value of those bonds in dollars. The combined surplus heads relentlessly to $1 trillion and beyond, particularly after the overt theft of over $300 billion of Russian reserves held in Western Banks, which in turn put the entire global system into disarray.
The new situation is that the BRICS+ countries will now use dollars to their advantage. They don't mind using dollars - what they hate is the Western private banking system and the risks of keeping dollar-denominated instruments in these banks.
The new game in town is that China and BRICS+ will hold these dollars within their own banks. They will now sell U$ bonds, and U$ companies in the U$, and lay off workers so that they can bring those dollars back to China too.
A look at the FDI average of expenditure from 2019-2022 shows that this trend was in place well before the theft of the Russian reserves - the writing was on the wall with China being in position #11 at only $0.7 billion with Canada being the biggest at $35 billion, Germany at $20.6, Japan at $16.7, South Korea at $5.4, Australia at $4.2, Singapore at $3.2, India $1.5, Qatar $1.3, Spain $0.8, and Norway similar to China at $0.7.
Of all of these countries, it is China that has the largest trading surplus with the U$ - where will these mountains of dollars go to work now? They are not going into U$ treasuries or the U$ FDIs.
Meanwhile, China's FDI continues to rise dramatically - just not into the U$.
The trade deficit for the U$ with China hit a 2-year high in July of 2023, at around $27.23 billion for the month (that's almost $1 billion per day). Not only is China not using this surplus to buy treasuries - they are selling them in the U$ and in other places too. So where are these dollars going?
They are lending most of them to their global trading partners - a massive gut-punch to the U$ hegemon. These dollars were, in reality, loans made to U$ taxpayers who have to pay them back, including accruing interest.
These same dollars are now being deployed in a new financial system that generates billions of dollars of real economic activity that benefits China and the giant BRICS bloc
GREENFIELD INVESTMENTS (GFI) PAINT A VIVID PICTURE TOO
GFIs are a very convenient way to bypass trade restrictions, as well as give the parent company a high level of control over general business operations, quality control, sales, brand imaging, staffing, economy of scale for marketing, R&D, and production levels.
But there are huge risks too, especially with the new global financial architecture beginning to take shape. Indeed GFIs can be one of the riskiest forms of foreign investment even when times are relatively stable.
The proposed Trumpster tariff policies which risk a full-on tariff war, as well as serious disruptions in global supply chains, make these risks exponentially higher - imposed tariffs on imports will cause hikes in the selling price of the company’s product which could render them completely uncompeditive.
We can see where some of these GFIs are going in the profile of FDI's top ten destinations in $Billions for the year 2023.
Saudi Arabia $16.5 B
Malaysia $13.5 B
Vietnam $12.5 B
Morocco $10 B
Kazakstan $8.5 B
Indonesia $8.2 B
Argentina $8 B
Serbia $6.2 B
Mexico $6 B
GOOD OLD MR TRIFFIN
This new global financial model will not involve national currencies as safe and efficient vehicles to hold reserves – on the contrary, the Chinese are more painfully aware of the traps of the Triffin Paradox than any other country on the planet.
Furthermore, the more ‘real’ a national economy is, as opposed to heavily financial FIRE-based (financial as opposed to industrial) models, the more important it is that export-based productive countries don’t fall into this trap.
THE TALE OF TWO ECONOMIES
People who ignore this ‘Tale of Two Economies’ will miss what is happening right under our noses as the Western model continues to machine-gun itself in both feet.
For me all of the evidence is on display that the Western model is reaching the climax of this self-evisceration, as now we see even the main productive and export-based Western-based powerhouses beginning to fail spectacularly – ALL of them.
Of course, the classic financial casino countries lead the way, but now the real (industrial) economy behemoths like Japan, Germany, and South Korea, are either kaput or have huge cracks appearing as they charge full steam ahead into self-inflicted debt death trap vortexes.
There are now multiple ways for countries that comprehend all of this to safeguard themselves from severe and imminent counter-party risk in the way they deploy their surpluses and reserves – including physical gold, silver which I believe will be remonetized very soon, and of course a whole host of durable commodities including all manner of non-monetary metals.
https://globalsouth.co/2024/02/09/solutions-to-the-western-train-wreck/
ROME VERSION II
I will finish with two salient facts – King-dollar has already lost 98.4% of its value relative to gold and the British pound an utterly mind-numbing 99.98% - with the Kiwi currency faring even worse.
This fact alone tells us just how precarious the entire concept of a national currency being deployed as a reserve currency has become.
Any country that ignores this reality as a direct lesson from the history of economics, will do so at its peril.
Colin Maxwell
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