Banking on a problem
The Council of the European Union has adopted new bank capital requirements as internationally agreed. But once again it couldn’t resist tinkering, despite the UK’s objections
There’s a common misconception that change is good; that revamping a perfectly working system or product is for the better, no matter what. People take functional and serviceable platforms or products then turn them into something new, because new is better. Shinier skin, better graphics, brighter colours.
But often what actually happens is that while something may look better, in reality, as was the case with New Coke or postal voting, the product or system has got worse.
The major problem with bureaucrats and politicians is that they get bored. And when they get bored, they tinker. A wee law here, a wee amendment there – the tinkering continues until you get an almighty mess-up such as the NHS is experiencing at the moment, or the Post Office sub-offices with their computer systems.
The Council of the European Union, with its willing puppets in the form of the politicians that are supposed to represent us, is a master at this tinkering.
Friday saw the adoption of the CRD4 regulations as agreed with the European Parliament, which replaces the existing capital requirement directive, by a regulation establishing prudential requirements and a directive governing access to deposit-taking activities.
Surprisingly, there has been little tinkering by the Council of the European Union of the capital requirements for banks and investment firms, although those lines in the sand that Cameron keeps blithering on about seem more washed away by the day. The UK voted against the adoption but qualified majority voting pushed it through, even though this is a direct hit on one of our main strategic industries. Welcome to our future.
Much of this was coming into force through the international Basel 3 agreement – capital requirements up two percent to 4.5 percent while total capital requirement remains at eight percent. Ditto the liquidity coverage ratio under which banks will have to have enough cover for 30 days of outflow. Even better is phasing it in over a five-year period – it almost sounds sensible.
In addition, capital buffers of 2.5 percent will be enforced at national level. So far, so Basel III.
But it is precisely this tinkering at an international level that could damage the nascent global recovery. With China slowing down and the US about to stop printing money, the demand that banks keep some capital back is, as always, a reaction to yesterday’s problem.
Don’t get me wrong, as far as I’m concerned, if a bank overexposes itself to the extent that it can’t handle a money run then that is its fault. The so-called moral hazard that was ripped up in a fit of panic by regulators around the world should be strictly enforced. But with predictions that Basel III could restrict global GDO growth by up to 0.15 percent, is this a sensible idea after all?
In addition, if it is so important to have capital buffers and liquidity reserve, what exactly was the point of the hyper inflationary-risking policy of quantitative easing?
One of the main points that ministers and regulators made was that there was a lack of liquidity in the system – so at the point of recovery, you want to turn the QE taps off and, at the same time, force banks to hold onto cash?
There has been huge chatter about competition, or rather the lack of it, but who do you think will suffer the most once these requirements are put in place? It won’t be the Barclays and HSBCs of the world, it will be the small banks and financial institutions – whither the competition then?
Of course, the European Council is following an international agreement but there is one other part of the council’s agreement that should concern anyone who believes in the principle of property rights – bankers’ bonuses.
The agreement sees bonuses capped at a ratio of 1:1 with variable deferred remunerations included with certain discounts dependent on deferrals of up to five years. That ratio can be changed to 2:1 but only if 66 percent of a quorum (50 percent) of shareholders vote in favour or 75 percent if no quorum is met.
I have said before, but I will say it again: forget about “thieving bankers” and that they “deserve what they get”, this is a fundamental assault on property rights and the rights of companies and their shareholders to decide what their employees’ pay and performance is worth.
Granted, the scratch-my-back mentality of remuneration boards should really be sorted out, but it is a fundamental principle that the shareholders and company decide on contractual matters of an employee. It is of no right, aside tax issues, for any government, or would-be supra-government to decide on bonus rates for bankers unless they are shareholders – and we saw how well that works with RBS didn’t we?
Secondly, instead of removing risk, it will increase it, as money will be moved into income rather than bonuses pushing up fixed rate costs at the expense of discretionary costs that can be shelved if the going got really tough.
And if you are working in, say, Barclays in New York, bad luck: the regulation applies to all staff of subsidiaries even if you don’t work in the European Economic Area and the European Free Trade Area.
That’s right. Years of tax deals between countries like Canada, America and Australia with the UK might as well be thrown out of the window when it comes to bankers. Brussels now decides your remuneration – although I really don’t see that standing up in a New York court, do you?
In another effort to kneecap a strategic industry for the UK, the number of employees, net banking income, profits, taxes, and subsidies will have to be reported to the Commission but I’m sure none of this commercially sensitive data will leak, or get into the hands of competitors will it?
The problem with coming up with something because you think it is needed, or because it’s new, is that the results, as the BBC found with its £100m computer error, may not necessarily bring the safety, or the change, you want.
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