Wednesday, March 10, 2010
When three pillars is not enough.
It is safe to say, in retrospect of course, that the Basel II rules and regulations regarding bank capital standards failed miserably in its first field test.
International rules being what they are (hashed out by years of tedious consensus forming negotiations), being behind the curve is part and parcel of the business.
That said, let us look at the "three pillars" (more akin to a chair with three legs) of the accord:
1: minimum capital requirements. Collectively, across the globe, banks were short over 600 Billion in capital. Unfortunately for Basel II and the regulators, the promulgators of financial instruments were far, far more sophisticated in smoothing huge risks via daisy-chain diversification.
2: supervisory review. Completely captured by the immensely profitable international banking system.
3 market discipline. This obviated itself. Market disclipline was circumvented in the name of crisis management.
So what is my point?
There is a massive tapestry of international rules and "laws" that have been generated in the post-war (that would be WWII) in order to foster international cooperation and connectivity. The Recapitulator applauds this. However, let us not be naive. This is, historically speaking, an anomaly...and the clarion panglossian call of "this time it is different" (or rather "this time someone has finally figured out how to achieve perfect balance and order in economies, in nations, and in people") always has an audience rapt with attention.
Progress is not linear. It is not circular...no...it follows some invisible metronome, silently allocating power until critical momentum is reached. Then, a reversal.