Last week,the New York Times ran a series of short op-eds in the “Room for Debate”section entitled, “Are Global Banking Rules ‘Anti-American’?” - a reference to the now famous reported run-in between JPMorgan’s Jamie Dimon and Mark Carney, Governor of the Bank of Canada,about Basel III - the pending package of rules that will require banks to hold more capital and liquidity. I wish there actually had been more room for debate because the Times gathered some interesting people, but, for the most part, the arguments they presented were not terribly meaty. It is still worth a read, however, if only to gauge the range of sentiment out there about this issue.
I was struck by a few comments made in these mini-essays. Steve Bartlett, the president and CEO of the Financial Services Roundtable (whose members are the heads of the country’s major financial institutions), backed up Dimon’s assertion the the new rules were “anti-American”because some things, like mortgage servicing rights and obligations of government-sponsored enterprises, that U.S. banks tend to count toward their capital will no longer be allowed in a few years.
That complaint is not entirely without merit, and,as the rules are being finalized, some tweaking might be in order. Having said that, these elements are minor issues. To espouse, as Bartlett does, that “If international regulators insist on proceeding, American regulators should be cautious in how they implement these rules for U.S. banks”seems a bit over the top. The banks need more capital - and the largest banks should probably have an incremental buffer to counteract their asymmetrical impact on the world’s financial system. U.S. regulators have been involved with these negotiations from the beginning –let’s not threaten to walk over minor points.
I have another quibble on the other side of the debate. Lynn Stout, a law professor at UCLA who favors increased capital requirements for banks also takes things a bit far. She first talks about how capital requirements limit banks’ability to use leverage –which, strictly speaking they don’t, but that’s ok: point taken. My issue with her argument is when she claims that “Bank shareholders want capital requirements that are as low as possible so the bank can borrow as much as possible. That way,they enjoy all the profits when times are good,but have only limited losses if the bank goes under.”
All I can say to that is: there are a lot of bank shareholders who actually want a boring, predictable company to provide boring, predictable dividends. Limited losses? Those dividends have largely been wiped out at some of the largest banks,and the stock prices are still very much in “loss”territory for many people. There are many bank shareholders who are middle-class investors who are hurting right now because of these “limited losses.” I’m sure that many are highly in favor of regulations that will get their bank back to boring and predictable.
For some down the middle commentary on Basel from this series, Simon Johnson and Douglas Elliott both provide what I think is a balanced look at the current situation. Johnson lays out why the social costs of limited bank capital matter, and Elliott, while supportive of the new accords, correctly points out that “the devel is in the details”and that we must be vigilant about ensuring that all countries implement the regulations. Not that they cry foul and go home.