Fisher Investments Editorial Staff
Others

Basel Bickering

By, 05/04/2012

Thursday, EU finance ministers failed to reach a consensus on plans to implement Basel III bank capital rules. On one side, UK Chancellor of the Exchequer George Osborne argued for member state flexibility in requiring banks hold even more capital than Basel 3 would require. Opposing him was ECB President Mario Draghi and French and German officials, who argued for a uniform EU standard. In the middle, Denmark proposed a compromise that didn’t bridge the gap. Basel 3’s details have been much-bickered over since first being agreed upon in 2010. (The same goes for Basel 2.5, Basel 2 before that and Basel 1 earlier.) This time, the debate seems as much—if not more—political machination than banking reform.

Recall, Basel 3 rules require banks to gradually boost capital to 4.5% of common equity (from 2%) and 6% of Tier 1 capital of risk-weighted assets (from 4%) by 2018. Likewise, it includes additional capital buffers and liquidity requirements to gauge risk in lending practices. French and German leaders feel uniform standards like these would level the playing field, a major tenet of Basel’s original mandate. On the other hand, the UK—arguably the EU’s banking hub—seeks the independence to increase increased controls on its banks. Banks that are coincidentally already better positioned than many of their European counterparts. Either way, a UK with higher standards likely carries pluses and minuses. While higher capital standards could dampen profitability relative to non-British banks, they could also increase a perception of stability.

So what’s the UK’s aim? It boils down to a bit of national sovereignty—something the Brits have sought since the EU’s creation: Rejection of the euro, a pan-EU financial transactions tax and the recent fiscal compact treaty, to name a few. And perhaps a bit of politicking. No doubt, tougher rules on UK banks give UK politicians fodder to show voters they took precautions above and beyond the rest of Europe to lower taxpayer bailout risk—a potentially popular position post-2008. All in all, the UK seems to be putting its interests ahead of an international banking standard similar to China, which did the same thing, albeit in a very different way, months ago.  

Now, many European and US banks currently meet Basel standards, are close to them or already exceed them. Nevertheless, the OECD estimates implementation of Basel 3 rules may cut into future global economic growth by as much as .15 percentage points—probably more in a Financials-heavy country like the UK. Which makes British desire for more sovereignty understandable, but does little to reduce the intrigue and back-and-forth. Eurozone officials are expected to reach an agreement by May 15. Maybe so. Or maybe they drag this one out a little longer. Either way, it remains an issue to watch.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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