New Basel Bank Rules Lack Transparency

Bank of America
Bank of America

A softening of the liquidity rules set by the Basel III accord are based on revisions that probably will help profits at the world's largest banks for now and may increase their lending. The change has not come with any new transparency about why the changes were made and which banks needed the change most of all to comply as the goal posts for certain key criteria were moved from 2015 to 2019. The weakest banks get the advantage of the changes. Investors and customers get nothing in terms of knowledge about the risks from institution to institution.

The key provision of the change is:

The minimum LCR (liquidity coverage ratio) in 2015 would be 60% and increase by 10 percentage points per year to reach 100% in 2019.

The way that certain assets are treated also have been altered in the favor of banks. Bloomberg describes the nature of the changes:

Global central bank chiefs agreed to water down and delay a planned bank liquidity rule to counter warnings that the proposal would strangle lending and stifle the economic recovery.

The new provisions would not have been made if all the banks that are covered were strong enough to make the goals of the original plan with ease. The idea that the change will increase lending is a theory at best. Similar actions in the United States that were meant to make it more attractive for banks to lend have done almost nothing to change the risks that financial firms will take. Credit remains easy to obtain for most large companies and hard to obtain for smaller firms and individuals. Banks in essence have decided to build and protect balance sheets. The same will hold true with banks overseen by Basel. The chance to improve balance sheet strength cannot be necessarily tied to new liquidity brought into the financial markets.

Investors, bank customers and the media get nothing from the change in rules. The banks that needed the alteration have not been identified, although they certainly remain at high risk for write-offs and additional aid from governments. More than once, shareholders of some banks have been wiped out since the start of the financial crisis. And the availability of capital has been tightened for years in countries in which the banks are most troubled.

Data that ranks the banks based on balance sheet strength should have been traded for the revised rules.

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