Watering down Basel III's not a sop to the banks

But it is still a hallmark of some worryingly misguided thinking.

The changes to the Basel III international banking regulations have been widely reported as a sop to financiers. But what actually happened?

The Basel regulations are about the stability of the banking system. When the third Basel accord comes into effect this year, it will introduce strict new requirements how leveraged-up banks can be, as well as mandating that they hold enough liquid assets to cover all of their cash outflows for a month. The idea is that by requiring these safety nets, the amount of revenue banks can make is curtailed, but so too is the risk that they will go belly-up in the event of another crisis.

The problem with Basel III is that reducing the amount of leverage a bank is allowed to use is the same as reducing the number of loans it is allowed to make, assuming its available capital stays the same. Reducing the number of loans is sort of what we don't want to happen, what with much of the developed world still being deep in depression and businesses clinging to survival by the skin of their teeth.

In fact, as the NYT's Andrew Ross Sorkin writes, the chances of a leverage induced crisis are quite low.

The change in Basel has been painted, by none-other than Mervyn King, as a trade-off. We thought that the big risk would be another bust; but now we know the big risk is a dead recovery. So lets water down the regulations. King said:

Since we attach great importance to try to make sure that banks can indeed finance a recovery, it does not make sense to impose a requirement on banks that might damage the recovery.

But the problem is, it's not Basel's leverage requirements that have changed. It's the liquidity ones. And they are a lot more important to implement sooner rather than later.

Leverage requirements are important in case we find ourselves in a situation like 2008, where the value of the assets banks are holding drops precipitously. Banks suddenly find themselves much poorer than they thought they were, and a wave of failures sweeps through the system. But we are a long way from the sort of bubble which is required for leverage requirements to be needed. First we need a recovery.

Liquidity requirements, on the other hand, guard against bank runs. And bank runs are a symptom of lack of faith in the system – something which remains very real today. The dilution of Basel now delays the implementation of those requirements, meaning that the risk of bank runs won't be actively fought until 2019; and it also weakens the very requirements themselves, allowing banks to claim a far larger pool of assets as "liquid capital".

Felix Salmon points out that what's really happening is that Basel III has become the latest in unconventional central bank actions:

The committee has clearly determined that if you’ve run out of ammunition in terms of interest rates and quantitative easing, then when you’re searching around for some other monetary-easing tool, regulations are a reasonable place to look. And I really don’t like that precedent. Monetary policy should be entirely separate from bank regulation, even if central banks should properly perform both roles. With the ink barely dry on the Basel III agreement, now is no time to start diluting it for the sake of some hypothetical temporary future marginal boost to growth.

It's important to point out that the actual changes may not be that bad. Alphaville's Lisa Pollack argues that there's a fair amount of whinging which ignores that the weakened regulations are still perfectly perfectly capable of fighting a liquidity crisis. But the principle of the change is still concerning. Regulators decided what would be the best and safest way of running banks, and then changed their mind based, not on new evidence that they could achieve the same safety with less stringent regulations, but on completely different criteria. That bears the hallmarks of the thinking which got us into this problem in the firs place.

A man walks down the banks of the Rhine in Basel, Switzerland. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.