Basel II and the Bail-out
Ask your Representative and Senators how Basel II is impacting the bail-out – and why we haven’t heard anything about it on the “news.”
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
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It\'s time to say \"When.\" 
September 30, 2008 at 4:02 pm
Great!
This should give responsible media outlets a greater opportunity to point out the history of how it is our economy got to where we are…beginning with the Community Reinvestment Act of 1977 (President Jimmy Carter); the push by the Clinton Administration to force sub-prime mortgage lenders to expand their offerings into under-qualified, high-risk groups; the money trail of industry lobbyists (esp. Freddie Mac, Fannie Mae) and their political allies (esp. Frank, Dodd, Obama, and other republicans as well); and, the efforts by the aforementioned, as well as Maxine Waters and Pelosi, to protect such industry practices via outspoken congressional opposition to reform measures.
Abusive mindsets in government caused these problems, not capitalism, and these same folks should not be given the opportunity to wash their hands clean of history when they have meddled dangerously close to criminality.
Pelosi never had the votes, and politics are the sole reason she brought this bill up so fast. She needs to resign! See My Site for more.
September 30, 2008 at 4:13 pm
We agree – but before we jump on the McCain/Palin bandwagon (*shudder*) – we will remind you and your readers AGAIN of John McCain membership in the group known as “The Keating Five”:
The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger Savings and Loan crisis of the late 1980s and early 1990s. The five senators, Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle (D-MI), were accused of improperly aiding Charles H. Keating, Jr., chairman of the failed Lincoln Savings and Loan Association, which was the target of an investigation by the Federal Home Loan Bank Board (FHLBB).
After a lengthy investigation, the Senate Ethics Committee determined in 1991 that Alan Cranston, Dennis DeConcini, and Donald Riegle had substantially and improperly interfered with the FHLBB in its investigation of Lincoln Savings. Senators John Glenn and John McCain were cleared of having acted improperly but were criticized for having exercised “poor judgment”.
October 1, 2008 at 1:02 am
Forwarded from a reader –
Let’s see if I can explain Basel II clearly –
In 1999, central bankers and finance ministers of 10 of the world’s wealthiest nations sent their deputies to the tidy Swiss city of Basel. The world’s leading financial regulators labored together to strike a balance between ensuring banks’ safety and giving them room to take risks and make money, finally in 2004 producing a recommended rulebook called Basel II.
The start date for American banks to begin submitting their plans for compliance to U.S. regulators was Apr. 1.
Basel II is intended to keep banks safe by requiring them to match the size of their capital cushion to the riskiness of their loans and securities. The higher the odds of default, the less they can lend, all else equal.
Here’s the problem. Today, many banks already face so many risks that implementing Basel II as written will put them in a capital squeeze. They will either have to reduce risk by cutting back on lending, or sell more shares to give themselves a bigger capital buffer, or both. If the banks do lend less, it could cause an even steeper economic decline, which would lead to more defaults and cause banks to ratchet back even more, and so on in a downward spiral.
Basel II has some good points. It’s based on the notion that bank shareholders need to have skin in the game, so if there are big losses, shareholders get wiped out before depositors or taxpayers are harmed. Like any company, a bank dies if its assets are worth less than its liabilities. Basel II says the riskier the loans a bank makes, the more of a buffer shareholders are required to put up.
The Washington-based consulting firm Federal Financial Analytics wrote positively about Basel II in a study released last December[2007], but said:
“The new rules kick in at a time of major credit-market problems, which will mean a sharp spike in U.S. bank regulatory capital.”
Said the firm:
“Significant amounts of risk-based capital will need to be raised in a hurry, driving a new wave of industry mergers and acquisitions.”
“This cycle is going to turn out to be much more severe than the banks ever expected,” says Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance (Calif.) firm that analyzes bank balance sheets. “When you start scoring the risk of this stuff using the Basel II framework, it’s pretty scary.”
How did we get to the point where an accord that’s supposed to avoid trouble could potentially make it worse? To understand that, you have to go back to the predecessor accord, Basel I, which financial regulators devised in 1988 to get banks around the world to beef up their capital. It more or less did its job: Unsafe banks got safer.
But banks soon learned how to game the system. To avoid having to tie up capital supporting the mortgage loans they made, the banks got those loans off their books by securitizing them. In fact, Basel I was a prime mover in the staggering growth of the mortgage-backed securities market. Basel I didn’t require capital backing for lines of credit as long as they lasted less than a year, so banks responded by issuing short-term lines of credit that they rolled over every 364 days.
Tired of being manipulated by the banks, the Basel Committee on Banking Supervision announced in 1999 that it was taking another stab at the problem. The idea was to align the banks’ capital more closely with their actual risks, in the process taking away some of the loopholes that let them hold less capital than they really needed.
While the internationally minded Federal Reserve mainly supported Basel II as written, the domestically focused bank examiners at the FDIC managed to push through some safeguards against under-capitalization. Unlike Europe, the U.S. will retain a crude “leverage ratio” that takes precedence over Basel II if the two measures give different results.
In late March[2008], Treasury Secretary Henry Paulson announced a plan for a sweeping reorganization of financial regulation in the U.S., which would give the Federal Reserve new powers as a regulator of market stability. However, the Paulson plan is mainly a set of general guidelines for reform that may or may not happen, while the Basel II rules are about to have an effect. [they did not happen, and now we have a big crisis]
We are so focused on the US situation that people aren’t realizing that this is happening in other countries too, maybe not as urgently as here, but it’s happening. This is a GLOBAL situation. Basel II compliant banks can ONLY lend to other Basel II compliant banks (both nationally and internationally). So far the ONLY Basel II compliant bank in the US is Goldman Sachs.
I hope this helps people to understand a little better.
R.
December 23, 2008 at 9:32 am
SayWhen,
Basel II has not (yet) been implemented in the US, although it is in use in many other jurisdictions around the world. It is not true that Basel II banks may not lend to Basel I banks (or any other regulatory system). Banks may lend to whomever they choose – it is just the risk premia that should vary. Part of the problem in the US was that risk premia being charged on many loans were too low – part of the whole point of Basel II was to address this.
I would contend that if Basel II had been in place a few years ago the current situation may not have been nearly as bad as it is. “R” was partially right on that.
Unfortunately, though, we may never know.