Basel III: Tightening the Noose on Credit (- in a recession?)

[onq]

As reported previously, the proximate cause of the current crisis appears to be located dear little old Switzerland, the home of cuckoo clocks, Nazi Gold and - in Basle - the Bank for International Settlements.


I published my letter to these cretins last year, in which I asked them to account for their actions in precipitating the current crisis by raising the capital lending ratios. Here they are again being reported as about to tinker with all out lives as the input of a mouse - again!


Someone needs to tell these geniuses to back off - forcefully.


ONQ.


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http://seekingalpha.com/article/225817-basel-iii-tightening-the-noose-on-credit#comment_update_link


The stock market shot up on September 13, after new banking regulations were announced called Basel III. Wall Street breathed a sigh of relief. The megabanks, propped up by generous taxpayer bailouts, would have no trouble meeting the new capital requirements, which were lower than expected and would not be fully implemented until 2019.
Only the local commercial banks, the ones already struggling to meet capital requirements, would be seriously challenged by the new rules. Unfortunately, these are the banks that make most of the loans to local businesses, which do most of the hiring and producing in the real economy. The Basel III capital requirements were ostensibly designed to prevent a repeat of the 2008 banking collapse, but the new rules fail to address its real cause.
Why Basel III Misses the Mark
Two years after the 2008 bailout, the economy continues to struggle with a lack of credit, the hallmark of recessions and depressions. Credit (or debt) is issued by banks and is the source of virtually all money today. When credit is not available, there is insufficient money to buy goods or pay salaries, so workers get laid off and businesses shut down, in a vicious spiral of debt and depression.
We are still trapped in that spiral today, despite massive “quantitative easing” (essentially money-printing) by the Federal Reserve. The money supply has continued to shrink in 2010 at an alarming rate. In an article in The Financial Times titled “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard quoted Professor Tim Congdon from International Monetary Research, who warned:

The plunge in M3 [the largest measure of the money supply] has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.
​

In a working paper called “Unconventional Monetary Policies: An Appraisal,” the Bank for International Settlements concurred with Professor Congdon. The authors said:

The main exogenous [external] constraint on the expansion of credit is minimum capital requirements.
​

(“Capital” means a bank’s own assets minus its liabilities, as distinguished from its “reserves,” which apply to deposits and can be borrowed from the Federal Reserve or from other banks.)
The Bank for International Settlements (BIS) is “the central bankers’ central bank” in Basel, Switzerland; and its Basel Committee on Banking Supervision (BCBS) is responsible for setting capital standards globally. The BIS acknowledges that pressure on banks to meet heightened capital requirements is stagnating economic activity by stagnating credit.
Yet in its new banking regulations called Basel III, the BCBS is raising capital requirements. Under the new rules, the mandatory reserve known as Tier 1 capital will be raised from 4 percent to 4.5 percent by 2013 and will reach 6 percent in 2019. Banks will also be required to keep an emergency reserve of 2.5 percent.
Why Is the BCBS Raising Capital Requirements When Existing Requirements Are Already Squeezing Credit?
Concerns about the credit-tightening effects of Basel III were reported in a September 13 Huffington Post article by Greg Keller and Frank Jordans, who wrote:

Bankers and analysts said new global rules could mean less money available to lend to businesses and consumers. . . .
European savings banks warned that the new capital requirements could affect their lending by unfairly penalizing small, part-publicly owned institutions.
‘We see the danger that German banks’ ability to give credit could be significantly curtailed,’ said Karl-Heinz Boos, head of the Association of German Public Sector Banks.
Insisting that French banks were ‘among those with the greatest capacity to adapt to the new rules,’ the country's banking federation nevertheless said they were ‘a strong constraint that will inevitably weigh on the financing of the economy, especially the volume and cost of credit.’
Juan Jose Toribio, former executive director at the IMF and now dean of IESE Business School in Madrid, said the rules could hamper the fragile recovery.
‘These are regulations and burdens on bank results that only make sense in times of monetary and credit expansion,’ he said.
​

For smaller commercial banks and public sector banks (government-owned banks popular in Europe), the credit-constraining effects of Basel III are a serious problem. But larger banks, said Keller and Jordans, “were quick to praise the agreement and insisted they would meet the required reserves in time.”
The larger banks were not worried, because "the largest US banks are already in compliance with the higher capital standards demanded by Basel III, meaning their customers won't be directly affected.” Their customers, of course, are mainly large corporations. “Small businesses that rely on borrowing from community banks,” on the other hand, “may be more affected . . . . They will try to make up for the higher capital requirements by lending at higher rates and stiffer terms.”
If the big banks that brought you the current credit crisis can already meet the new requirements, what exactly does Basel III achieve, beyond shaking down their smaller competitors? As [broken link removed] remarked in a September 13 article called “Biggest Banks Already Qualify Under Basel III Reforms”:

Indeed, on the day Lehman Brothers collapsed, THEY would have been in compliance with the Basel III standards.
​

Punishing Your Local Bank for Wall Street’s Misdeeds
What precipitated the credit crisis and bank bailout of 2008 was not that the existing Basel II capital requirements were too low. It was that banks found a way around the rules by purchasing unregulated “insurance contracts” known as credit default swaps (CDS). The Basel II rules based capital requirements on how risky a bank’s loan book was, and banks could make their books look less risky by buying CDS. This “insurance,” however, proved to be a [broken link removed] when AIG (AIG), the major seller of CDS, went bankrupt on September 15, 2008. The bailout of the Wall Street banks caught in this derivative scheme followed.
The smaller local banks neither triggered the crisis nor got the bailout money. Yet it is they that will be affected by the new rules, and that effect could cripple local lending. Raising the capital requirements on the smaller banks seems so counterproductive that suspicious observers might wonder if something else is going on. Professor Carroll Quigley, an insider groomed by the international bankers, wrote in Tragedy and Hope in 1966 of the pivotal role played by the BIS in the grand scheme of his mentors:

[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.
​

The BIS has now become the apex of the system as Dr. Quigley foresaw, dictating rules that strengthen an international banking empire at the expense of smaller rivals and of economies generally. The big global bankers are one step closer to global dominance, steered by the invisible hand of their captains at the BIS. In a game that has been played by bankers for centuries, tightening credit in the ebbs of the “business cycle” creates waves of bankruptcies and foreclosures, allowing property to be snatched up at fire sale prices by financiers who not only saw the wave coming but actually precipitated it.
Disclosure: No positions

 

[Chris]

I have to disagree with the underlying idea of this article that tighter reserve requirements were the cause of the crisis. They were merely part of the trigger that exposed the complete shambles that is the credit based consumption economy that has existed for way too long. In order to consume you first have to produce, but this is not the appealing option over buy now pay later that governments and consumers are so incredibly hooked on.
The only way out of this crisis is less debt (credit) and more savings through productivity. If the BIS is seriously looking at increasing reserve requirements then in the long term this is a very, very good thing.
I agree that the whole central banking and monetary system is as corrupt as it gets, but it is not correct that they are fully independent of government control. It is precisely governtments that enforce and control the monetary system. They may be labeled as "private enterprises", but the way they are controlled and actually owned is nothing even remotely like a private enterprise.
And the fact that smaller banks that may have well been prudent in their business practices are struggeling so much, is because large banks and their creditors were bailed out. If this had not happened then there would have been some market open up for the smaller institutions. This is all failure of interventionism.

 

[darag]

As reported previously, the proximate cause of the current crisis appears to be located dear little old Switzerland, the home of cuckoo clocks, Nazi Gold and - in Basle - the Bank for International Settlements.

I guess it's only a slight variation of the age old motif that in its variations has the Jews, the Illuminati, the Vatican or an alien species wielding such esoterically destructive global power. If you can provide any sort of link between this "cause" and the lending practices at Anglo, for example, please go ahead. By the way cuckoo clocks aren't from Switzerland.

 

[onq]

The Greeks, after Ctesibius have moved on, which is the point.

There are no conspiracies - just small numbers of people thinking the same thing and influencing the population to promote the aggrandisement of the small group.

Doesn't matter whether its a Monarchy, the holy Roman Empire or the Capitalist System - serfs ye are and serfs ye will remain.

ONQ.

 

[onq]

I have to disagree with the underlying idea of this article that tighter reserve requirements were the cause of the crisis. They were merely part of the trigger that exposed the complete shambles that is the credit based consumption economy that has existed for way too long. In order to consume you first have to produce, but this is not the appealing option over buy now pay later that governments and consumers are so incredibly hooked on.
The only way out of this crisis is less debt (credit) and more savings through productivity. If the BIS is seriously looking at increasing reserve requirements then in the long term this is a very, very good thing.
I agree that the whole central banking and monetary system is as corrupt as it gets, but it is not correct that they are fully independent of government control. It is precisely governtments that enforce and control the monetary system. They may be labeled as "private enterprises", but the way they are controlled and actually owned is nothing even remotely like a private enterprise.
And the fact that smaller banks that may have well been prudent in their business practices are struggeling so much, is because large banks and their creditors were bailed out. If this had not happened then there would have been some market open up for the smaller institutions. This is all failure of interventionism.

I cannot agree that "The only way out of this crisis is less debt (credit) and more savings through productivity."

First we need to stop putting money in the Anglo Black Hole.
This Bank should have been let fail, period - I said it at the time and I say it again.
Forget the international investors - they have us by the proverbials no matter what we do.
But taking on debts we never asked for to bail out gamblers on the property market who bought at the wrong time? No.
That prevents us borrowing going forward to blunt our potential economic growth for the next fifty years, for goodness sake!!!

An economy is considered stronger based on the number of profitable transactions that occur - note the use of the word "profitable".
With more savings, there is "less" of an economy - which is part of the reason Japan's economy never recovered properly, despite all their exports.
They are a great nation of savers = taking money out of circulation = lowering economic activity overall = decreased demand = a continuous deflationary spiral.

It doesn't matter how the money gets in the economy - credit or savings - as long as credit repayment terms can be met.
Right now America wants people to buy dollars and for everyone but the banks, "savings" are being touted as the way to go - nonsense!
Total savings seldom equal even one year's income every in a middle class democracy - how can they, when you have food, education, health, recreation and lifestyle to support?

And every Euro you save is a Euro taken out of the economy.
Whether its multi-millionaires hoarding profits or small savers - its killing the economy.

Since credit terms are usually paid for out of ongoing and current profits, advocating savings over purchasing goods is invoking a negative influence on any economic recovery.

There is, as a separate but related issue, the whole issue of value for money for goods and services.
Both need to be affordable and give value for money - this can be defined as the value of what you paid for both in terms of the immediate return and its renewal or repeat period. e.g.; -

A washing machine should not only be economical on its power usage, but also its water and cleaning agent usage, as well as only using the required amount of agitation to achieve the was to avoid unnecessarily damaging the fabrics - less is more.

It should be designed to give optimal performances between services and not need replacement for a specified period - its is the balance between the price charged, the cost of production and running it and the renewal period that defines its determined value.

IOW, "built in obsolescence" as opposed to "built in repairability" is not something the leads to either good value or a sustainable use of resources.

ONQ.

 

[Chris]

I cannot agree that "The only way out of this crisis is less debt (credit) and more savings through productivity."


First we need to stop putting money in the Anglo Black Hole.
This Bank should have been let fail, period - I said it at the time and I say it again.
Forget the international investors - they have us by the proverbials no matter what we do.
But taking on debts we never asked for to bail out gamblers on the property market who bought at the wrong time? No.
That prevents us borrowing going forward to blunt our potential economic growth for the next fifty years, for goodness sake!!!

I couldn't agree more with you. No private enterprise should ever be bailed out by governemtns, or more importantly the taxpayer. I hope that none of my comments indicated otherwise.

An economy is considered stronger based on the number of profitable transactions that occur - note the use of the word "profitable".
With more savings, there is "less" of an economy - which is part of the reason Japan's economy never recovered properly, despite all their exports.
They are a great nation of savers = taking money out of circulation = lowering economic activity overall = decreased demand = a continuous deflationary spiral.

This is utter nonsense. Before people can consume they have to produce. In order to produce something you need land labour and capital. Savings = capital. The reason Japan never recovered is because all the money saved by the Japanese public was squandered on endless stimuls packages with bridges being built to nowhere and industry after industry being bailed out. Japan never allowed for bad inefficient businesses to go bankrupt, but instead spent the last 17 years propping up the economy while at the same time racking up a level of debt that far exceeds every other country on the planet. They never let the credit fueled artificial boom actually burst. This is like trying to treat an alcoholic with heroin!

It doesn't matter how the money gets in the economy - credit or savings - as long as credit repayment terms can be met.
Right now America wants people to buy dollars and for everyone but the banks, "savings" are being touted as the way to go - nonsense!
Total savings seldom equal even one year's income every in a middle class democracy - how can they, when you have food, education, health, recreation and lifestyle to support?

How can you come to an adequate level of personal savings? By making sacrifices!

And every Euro you save is a Euro taken out of the economy.
Whether its multi-millionaires hoarding profits or small savers - its killing the economy.

Since credit terms are usually paid for out of ongoing and current profits, advocating savings over purchasing goods is invoking a negative influence on any economic recovery.

This is total Keynesian tripe and does not hold up to any logical scrutiny.
Look at what savings means. When someone saves money (rich or poor), they don't put it under the matrass where it is not used. They mainly put it in a savings account or they may directly invest it in a business or business expansion. Money put into a savings account is loaned by a bank to either an individual or a company, who use the funds to purchase something. So it is not correct to say that savings leads to less spending. What savings means is that the saver allows someone else to do the spending for them.
Without savings there is no increase in capital. And without increase capital there is no increase production. And without increase production there is no recovery.

There is, as a separate but related issue, the whole issue of value for money for goods and services.
Both need to be affordable and give value for money - this can be defined as the value of what you paid for both in terms of the immediate return and its renewal or repeat period. e.g.; -

A washing machine should not only be economical on its power usage, but also its water and cleaning agent usage, as well as only using the required amount of agitation to achieve the was to avoid unnecessarily damaging the fabrics - less is more.

It should be designed to give optimal performances between services and not need replacement for a specified period - its is the balance between the price charged, the cost of production and running it and the renewal period that defines its determined value.

IOW, "built in obsolescence" as opposed to "built in repairability" is not something the leads to either good value or a sustainable use of resources.

Yes, but value for money is a subjective matter. If I'm happy buying a washing machine for €200 that costs more to run and may need replacing every 2 years then why should anybody question my choice? If you want to spend €2000 for a machine that will last 20 years, then why should anyone of an opposite opinion influence or dictate your choice?
People in their purchasing behaviour are making constant choices and thereby providing feedback on what they want and don't want. If there were enough people that wanted a machine like you describe at a payable price then someone would be making it!