Brown-Vitter draft bill would undo all the progress international regulators have made in controlling finance

Turning back the clock on international finance.
Turning back the clock on international finance.
Image: AP Photo/Keystone, Georgios Kefalas
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The just-leaked draft of the Brown-Vitter legislation—which would peel back the Basel III international banking regulations but hike capital requirements at the US’s biggest banks—would be the worst thing that could happen for international cooperation between regulators.

After the financial crisis, there were years of argument over how to make the global financial system safer. A crash which began on Wall Street with the collapse of Lehman Brothers in September 2008 quickly turned into a global meltdown. Coordination was necessary to stall the fall in financial markets, and get the global banking system back in cleaner shape.

The Basel III rules tried to that coordination permanent, and also obliged big banks to hold high-quality (Tier 1) capital equivalent to 6% of their risk-weighted assets, with even higher premiums for bigger banks. These new capital requirements are still being implemented. On top of that, legislators in America who agreed to the Dodd-Frank act imposed additional restrictions on banks, and US regulators have the authority to raise capital requirements even higher.

What’s most likely to worry banks about the proposed Brown-Vitter law is the higher capital requirements, which would restrict the amount of their funds that they can invest. That 10% level is the highest number we’ve seen so far—particularly since, unlike Basel III, it doesn’t let banks risk-weight their assets, which allows them to value higher-rated assets more highly than riskier ones. And organizations which represent banks have, so far, mounted an attack on these provisions of the Brown-Vitter draft, much as they did the initial provisions of Dodd-Frank. Holding more capital makes their businesses, and their economies of scale, less profitable.

Banks, of course, invariably emphasize the risks to the economy, not to their profits. “Excessively high capital will restrict banks’ ability to lend to businesses and job creators, and hurt economic growth,” says Rob Nichols, the president and CEO of the Financial Services Forum, which represents CEOs of the largest US banks.

But the real assault is less on the banks themselves than on the progress that’s been made by international regulators. It’s clear that the global financial system is interconnected, and that failure in one region often precipitates failure or decline in another. That makes cooperation between regulators essential. It has been tested recently, with the US Federal Reserve considering provisions that would make it more difficult for foreign banks to operate on US soil. After much hubbub, the Fed seems willing to reconsider.

However, a bill that would pull the US out of Basel (and thus render it pointless for anyone else) wouldn’t just complicate relationships with foreign regulators; it would probably sever all the ties that have been made in the last few years. “[This] is hard-fought stuff that’s not really easily negotiated,” remarked an employee of a major Wall Street investment bank, who shared his thoughts on the condition of anonymity. “Banks are more global, and I think they’ve followed industry and that’s more global.”

Sources commented that they doubted the proposal would go through, particularly with this provision in place. Get ready for the complaints to start rolling in from foreign regulators and politicians.