Curious Capitalist

How Banks Are Watering Down Financial Reform Now

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Banks have won again. The recent news that the new international banking regulations (known wonkily as Basel III) have been watered down by the banking lobby to allow them to continue doing daily business with nearly as much borrowed money as in the past is a real disappointment. (See the FT’s smart analysis of this here.)

As I’ve written in numerous stories, including my recent “How Wall Street Won” cover, much of the conversation these days around making the financial system safer centers around leverage, or the ability of banks to borrow more money than they can immediately repay. If there’s too little, banks can’t conduct their business and capital gets constrained. But if there’s too much (as there still is) there’s a high risk that the banks won’t be able to meet its obligations if they are called in. As is it, banks will still be able to keep doing business with roughly 96 percent borrowed money, when many reform minded economists and financial experts believe it should be more like 80 percent.

That’s what it was for big New York banks in the run up to the Great Depression, which is the key reason, according to Fed historian Allan Meltzer, that they didn’t go under while many less well capitalized regional banks did. What’s more, even the current proposed Basel rules won’t be in effect until 2018 — leaving plenty of time for banks to gamble, and to lose. Here’s hoping incoming Fed chair Janet Yellen takes a close look at all this.

(VIDEO: What Happened to the Main Players Behind the Financial Crisis?)