Basel, DC

by | 6 Oct 2016 | Sustainable Finance

I’m here in Washington DC for a couple of days, to attend the IIF and IMF annual meetings. It’s a wonderful opportunity to talk about regulatory matters with peers and public sector officials.

In my United Airlines flight from Paris to DC today, I was neighboring a south-african woman, living in San Diego. I must confess that I love to talk with unknown people and in every occasion, I try to.

She was extremely charming and intelligent, and during most part of the trip, we spoke of everything: our lives, our families, our projects… She was the mom of three children, 7, 9 and 11. She had met her husband – a jewellery trader – in South Africa and married him. Then, she had decided to focus for some time on the education of their children, becoming a full time mom.

At some stage, we talked of firearms, and she explained me quietly why they had some at home and how her husband and her were training their children to use arms and to be cautious with it (I just remind the ages of the children: 7, 9 and 11). She told me that the children had no access to these firearms but that, as soon as they would be able to use it wisely, they would. She also explained me how, in the countries where firearms were at some stage forbidden, honest people brought them back to authorities, and how violence and crimes grew up at the very same time.

I want to make it clear: this woman was intelligent, wise, well educated…

It’s not my purpose to make a judgment here, and I don’t want to say whether her ideas were good or bad. Even if they were definitely extremely disappointing for the European citizen I am, I must say.

Why do I tell this story ?

Here, in DC, we are going to talk essentially of the very important discussions which are currently going on in Basel about bank regulations (see my preceding post on that).

The Basel Committee’s members include Japan’s FSA, Germany’s Bundesbank, the U.S. Federal Reserve and many other regulators and central bankers of the world. It is racing to finish work on the post-crisis capital framework by the end of the year, under G20 instructions not to increase capital requirements significantly in the process.

Driven by US regulators, being themselves under a strong domestic political pressure, Basel Committee tries to come back to a type of capital framework (the level of capital required from banks) less risk sensitive, essentially inspired by what was called « Basel I », a round of deliberations which took place at the end of the 80’s.

From what we know of the current stage of discussions, the rules will have very negative consequences for the economies of specific regions, such as Europe or Japan, especially in the financing of corporates or infrastructures.

Don’t worry, European systemic banks will be able to meet new capital requirements, but it will not be without extremely serious unintended consequences for our economies.

Almost all the countries in the world are opposed to the project but the US (and maybe the post-Brexit UK). But at the end of the game, the winner will probably be the US.

Because the US know how to exercise power. They always knew it.

They will not need to use firearms. The power they exercise is a « soft » one : « soft power » is a concept developed by Joseph Nye of Harvard University to describe the ability to shape the preferences of others through appeal and attraction; there is no army, no weapons, just lobbying and influence.

In my preceding « Basel » post, I wrote « 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 ».

Listening to my charming Californian neighbor, I understood we could lose the fight. Because despite being united, European and Japanese regulators don’t have the real willingness to fight, the one the US do have, the one they always had, in every aspects of their lives.

Hopefully, a miracle will happen and the non-US side of the table will have the courage to refuse to impose to European or Japanese citizens some new pains. But a likely outcome of the discussions could bring us back to a US inspired « Basel I » framework and its poor way to manage risks, as the 2008 crisis clearly demonstrated it.

Maybe should we more properly say: a « Basel DC » framework  ?

Iconography : America’s Capitol building in Washington DC, where the US Congress is located © Wikimedia Commons / Martin Falbisoner. Post originally published, with a different illustration, on LinkedIn.