whose risk is it? bank capital, basel iii, and the bankers

This weekend the G20 Summit takes place in Seoul. The Basel III enhanced capital requirements (among other standards) come up for adoption. Even as seasoned present and former regulators, such as Mervyn King and Paul Volcker, suggest that the new standards might not be sufficient, bank CEOs such as Mr. Pandit of Citigroup and Mr. Diamond of Barclays PLC have been railing against them. Such standards, it is complained, will hurt borrowers and raise the cost of credit. Uncle Sam needs us to loosen the restrictions on bank risk taking. Heck, it is even time to start paying dividends again.

So who knows how much of Basel III will make it out of the weekend?

In a thoughtful article in the American Banker Heather Landy suggests that Mr. Pandit’s condemnation of the Basel III rules reflects the perspective of a banker, for whom making money is about taking on greater risk, whereas the higher capital approach of Basel III and the views of regulators such as Mr. King reflect their own differing concern for safety and soundness. Ms. Landy quotes one commentator:

“Vikram [Pandit] obviously has got an agenda, but forgetting about the messenger, the point he’s making has as much truth as the point Mervyn’s making: It’s a trade-off,” said David Min, associate director for financial markets policy at the Center for American Progress, a progressive think tank. “Lending provides social value and economic value, but it also provides risk.”

This might be true. But an important question is who bears the risk? As we saw with the financial crisis, we all do.

Timely, therefore, is a reminder by economic experts who have already produced a supporting academic study, noted on this blog, demonstrating that the social costs of higher capital requirements are low while the social benefits are very high. Their reminder takes the form of a letter to the Financial Times, which can also be viewed for free at the website of the Stanford Graduate School of Business.

The letter is a stout antidote to the huffing and puffing going on at executive keynote addresses. Taking risk to add value is one thing, but dumping the costs of failure onto everyone else is not so great.

6 comments for “whose risk is it? bank capital, basel iii, and the bankers

  1. November 10, 2010 at 1:01 am

    Terrific stuff. And I love the Stanford link. Most bloggers forget to offer alternatives to pay links. I mean if you’re a finance junkie, like me, you lose those 10 hits fast. I know you can still get in free by inputting the article title in Google, but it’s a courtesy and people appreciate that. Not to mention the fact the letter is awesome, and it’s awesome to see the names attached to it, such as Fama.

  2. February 3, 2011 at 1:09 pm

    “We argued, when banks appeared strong,
    That more capital was needless and wrong,
    But we changed this impression
    In the current recession,
    Which more capital, we claimed, would prolong.”

    • Lawrence Baxter
      February 3, 2011 at 1:27 pm

      Perfect, Dr. Goose!

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