Basel III's Deadly Cocktail
By David Henderson
The global sovereign debt crises, and the Greek fiscal crisis, are bad enough on their own. Basel III is just making things worse. If I may summarize past comments, under the purview of Basel III banks in the United States and eurozone banks are shrinking their risk assets relative to their equity capital. As a result, broad money growth [sic] for the euro area is barely growing and moving sideways.
This is from Steve Hanke, “The Deadly Cocktail of Basel III,” Energy Tribune, September 14.
The whole thing, which is short, is worth reading.
HT to Pierre Lemieux and Jeff Hummel.
San Jose State University economist Warren Gibson, commenting on Hanke’s article, writes:
1) Bank of America stock (BAC) is currently traded at about 1/3 of book value, but full book value is counted as Tier 1 capital. If shareholder equity were used instead of book value, BofA’s capital ratio would be worse than Basel III accounting would have it, though I’m not sure by how much.
2) BofA engages in many businesses outside of deposit banking, e.g., Merrill Lynch — retail brokerage and investment banking. If BofA’s book value were to be apportioned among these businesses, one wonders how much would be attributed to deposit banking. Perhaps Basel III does such apportioning; I don’t know.
3) Preferred stock equity is to be excluded from Tier 1 capital if it carries a call date as most do, no matter how far in the future the call date is. Seems like preferreds with a distant call date would be economically little different from those with no call date.
4) Is anyone questioning the very idea of one-size-fits-all capital requirements and contrasting it with market discovery of prudent ratios, i.e., free banking? What the banking business needs most is occasional failures to put the fear of God into managers and depositors alike!
On point 4, as long as we have deposit insurance, you can’t put the fear of God into depositors.