Earlier this week, on the eve of a G-20 meeting, some European ministers were not only threatening to implement tough restrictions on the financial services industry, but they also asserted that the G20 was largely in alignment. That did not seem credible, particularly given the US propensity to talk tough and do very little on this front.
Predictably, fissures are already emerging in this supposedly united front. Two days later, the officials are already bickering. The US, backed by the UK and Canada, is pushing for new rules that call for more stringent capital requirements for banks. The EU ministers are not keen, arguing that first Basel II needs to be put into effect, then additional reforms can be implemented.
And why the focus on Basel II? European countries adopted it, and the US has not (yet). As Reuters noted:
France and Germany were cool as they pushed for more countries to adopt the Basel II rules in full, something which the United States has resisted.
Geithner wants the new framework to be broader and tougher, requiring banks to hold more capital and be in place by the end of 2012 — an ambitious target as Basel II took a decade to thrash out.
This vignette illustrates why the banksters have nothing to fear. First, despite bold talk about coordination and harmonisation, national officials will look after their own institutions first.
And why are the EU officials so keen to defend Basel II? It isn’t as if compliance with Basel II meant European banks dodged the financial crisis bullet. In fact, the real reason for upholding the standard is that Eurobanks made an art form of gaming it, with the result that some of the large banks are believed to have even weaker capital bases than US banks (given the widespread regulatory forebearance, it’s harder to be certain where many banks stand).
Second is that it takes a very long time to reach agreements of this sort. Geithner knows that full well, which is why he can take what looks to be a bold stance without worrying about needing to climb down for his original stance without it being too obvious that he has done so.
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“The EU ministers are not keen, arguing that first Basel II needs to be put into effect, then additional reforms can be implemented.”
What!?! Hasn’t Basel II proved to be a total failure?
Looks like Geithner killed pay limits:
“Finance ministers of the largest industrial countries…failed to agree on any firm limits on bankers’ bonuses…”
“Mr. Geithner has been cool to proposals to restrict bonuses, instead emphasizing the need for higher capital requirements at banks and other broader regulatory measures…”
“That was a setback for French and German ministers who had been pushing hard in recent weeks for a more concrete plan to address bonuses…”
http://www.nytimes.com/2009/09/06/business/global/06ministers.html?hp
This is the reason that I was critical of Stiglitz’s idea of moving to a non-dollar reserve currency. Individual countries or small groups of countries will pursue their own short term interests with no particular regard for and at the expense of everyone else. It takes strong, sustained, and wise leadership, essentially by us, as the world’s superpower and largest economy to overcome these parochial interests. And who do we have to provide this kind of leadership? Timothy Geithner. When you have stopped laughing and remember what terrible straits we are all in financially and economically, it is really more sad than funny.
I would also note that AIG still holds some $200 billion of regulatory relief CDSs written on European banks so the weakness of those banks should be a concern to us as well.