Basel III won’t save us from another banking crisis

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It is a gross overstatement to claim that the Basel III rules on bank capital are a major improvement in the protection against systemic risk of bank failure, says Leigh Skene at Lombard Street Research.

“Banks have shown great skill in overcoming capital regulations in the past – and there is no reason to believe they have lost that skill,” he says.

Mr Skene argues that realistic leverage limits would achieve the same objective much more easily than the very complicated Basel III. “More to the point, Basel III is seriously remiss in what is not included,” he says. “It does not adjust unduly low risk weightings, such as the zero per cent risk weighting for governments that can’t print the money they borrow in – Greece for example.

“In addition, Basel III ignores the real systemic risks, the hidden losses on the vast quantity of mispriced sovereign bonds that European banks hold and the somewhat smaller amount of bad mortgage debt US banks still hold.”

Mr Skene believes banks have been premature in starting to reduce their loan loss provisions in the second quarter. “US loan loss reserves, for example, represent only 1.2 years of losses, against 3.6 years in the first quarter of 2006. Clearly, they aren’t worried about toxic assets.

“Contrary to official proclamations, Basel III won’t save us from another banking crisis. In fact, the next crisis could happen before any of the Basel III rules come into effect.”

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