Basel … (but read it!)

by | 3 Aug 2016 | Sustainable Finance

When I was a child, Basel was for me the wonderful door to the world. I still remember, accompanying my mother driving on Friday evenings the «Peugeot 404» from Belfort to Basel to pick up my father at the airport: I was so proud to be part of the life of my hero !

Let’s go back to earth: he was simply coming back from his business trips, but in my child’s glance, he was more probably returning from Jules Verne’s «Extraordinary Journeys»…

At some stage, something went wrong in my life, and instead of becoming an Indiana Jones type explorator, I became a banker … Sorry ! By chance, it doesn’t prevent me from living, loving, having difficulties to face, like anybody… Lets’s summarize : bankers have also a human life to deal with.

To come back to our subject, Basel didn’t lose anything from its mistery now it became for me a «Committee».

In reality, TWO Committees :

  • one is the «Basel Committee on Banking Supervision» (so called the «BCBS»). Its mandate is «to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide». Whoosh! Such a mandate, plus the life in Basel!… I know what I am speaking about!
  • the other is the «Group of Governors and Heads of Supervision» (the «GHOS»). It is the oversight body of the first one … which is defintly not an easy task.

Anybody speaking of financial supervision is supposed to start by emphasizing the importance of building an «open and resilient financial system». But let’s try to be intellectually honest: at the end of the day, in a modern economy, all is about a question of policy choice between resilience of the financial system and dynamism of the economy. And this choice materializes in the level of leverage you are ready to collectively accept in a society. Instead of bashing bankers like everybody, politicians would be well advised to think about what is the right level of leverage they want to reach: the one which satisfies also the life of citizens, job seekers, consumers (eventually voters if only this last category interests them)…

Everybody agrees on that, and in developed economies, there is a broad consensus that the initial so called «Basel III» package brought the banking system to a kind of equilibrium (and thanks to European Central Bank quantitative easing policy, without too many consequences in Europe in terms of growth and jobs). And if markets are worried about Commerzbank or Monte dei Paschi, they should turn to the bank supervisor who has the means to request specific capital requirements, (so called « Pllar II » requirements ), without macro-economically constraining all the financial system.

Everybody agrees but BCBS guys … They suggest now to adopt some new rules, essentially aligned on the US system, forgeting the european risk-based approach (which explains that during the financial crisis, no french bank for example had to request any «bail-out» resolution plan based on tax payer contribution). These new rules would have impressive deleveraging consequences, not only in Europe, but also in the rest of the world (only the US would be partially protected).

It’s what is called by the banking industry – future will say whether this was appropriate – «Basel IV» framework.

These proposals are on the table: they have been prepared by the Basel based «BCBS» to be adopted in the next months by the «GHOS», before becoming the guidelines for all supervisors and policy makers in the world.

The banking industry provided all necessary explanatory datas to the policy makers.

Then, we are at a moment of truth: either «GHOS» members didn’t understand these datas and the consequences these measures would have on growth and jobs in the world (particularly in Europe and Japan) and then : «Houston, we have a problem»…

Or they suffer of a lack of courage, the one of «two hours after midnight» mentioned by Napoleon, at this time you are not sure anymore the sun wil rise again. This difficult time you have sometimes to face in your personal life too…(apologize to my «Brexit» British friends for the reference to Napoleon).

We are facing rough weather. We are «two hours after midnight» in many aspects : without a bit of courage, we will not succeed in anything.

Coming back to my father, my hero, the one we went to pick up on Friday evenings at Basel Airport with the «Peugeot 404» … all is about courage.

Iconography : Peugeot 404 dash car,1965, personal collection. Post originally published on LinkedIn.