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Opinion: The Obama administration wants to empower Ben Bernanke. Will it work?
In November of 2007, the Fed finally emerged with a set of rules to be used only by the biggest banks. By then, the subprime market was crashing. Citigroup had fourth quarter net losses of $9.83 billion. The banks were supposed to begin to implement Basel II in summer of 2008, but the plan was scrapped when they found themselves in the middle of a huge capital and liquidity crisis.
No U.S. banks are operating under Basel II today, according to a spokesman at the Federal Reserve. But it has been implemented in Japan, Canada, Europe, Israel and dozens of other nations. The U.S., which has the largest financial system in the world, dragged its feet in modernizing how it assessed and backstopped risk.
“Those countries that have had Basel II in place have reported very favourable results,” Bill Coen wrote in an email. Coen is deputy secretary general of the Basel Committee on Banking Supervision, for the BIS in Switzerland.
Simply implementing Basel II, however, would not have necessarily guaranteed a better outcome for the U.S. Although it was intended to create a uniform standard among countries, each country was left to impose its own schedule and methods.
The crisis revealed weaknesses in the general Basel II formula, which is being redesigned. Most of the losses during this crisis were in the banks’ trading books. As a result, the committee has recommended that capital reserves of 8 percent be held against trades, instead of the 4 percent previously suggested.
The global financial system is so complicated that no one person can understand it, writes the BIS in its annual report. It’s time to listen and learn from the ideas from abroad, not only about reducing bank size, but how other countries intervened before the meltdown. Spain’s central bank strengthened its monitoring of loan evaluations, India tightened capital requirements, some Asian countries moderated the credit boom, and Canada limited bank leverage.
If the Fed becomes the systemic regulator, the chairman must be willing to be the traffic cop, chasing speeders, arresting reckless drivers, requiring maintenance, enforcing rules and keeping the system from crashing. If he waits another 10 years to implement what is quickly becoming the new Basel III, the too-big-to-fix banks could wind up causing another multi-country pileup.
Susan E. Reed has covered business and international affairs for CBS News, The New York Times, The New Republic and other news organizations.
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