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.

Photo:Getty
Show Hide image

Why isn't Labour putting forward Corbynite candidates?

Despite his successes as a candidate, the organisational victories have gone the way of Corbyn's opponents. 

The contest changes, but the result remains the same: Jeremy Corbyn’s preferred candidate defeated in a parliamentary selection. Afzhal Khan is Labour’s candidate in the Manchester Gorton by-election and the overwhelming favourite to be the seat’s next MP.

Although Khan, an MEP, was one of  the minority of Labour’s European MPs to dissent from a letter from the European parliamentary Labour party calling for Jeremy Corbyn to go in the summer of 2016, he backed Andy Burnham and Tom Watson in 2015, and it is widely believed, fairly or unfairly, that Khan had, as one local activist put it, “the brains to know which way the wind was blowing” rather than being a pukka Corbynite.

For the leader’s office, it was a double defeat;  their preferred candidate, Sam Wheeler, was kept off the longlist, when the party’s Corbynsceptics allied with the party’s BAME leadership to draw up an all ethnic minority shortlist, and Yasmine Dar, their back-up option, was narrowly defeated by Khan among members in Manchester Gorton.

But even when the leadership has got its preferred candidate to the contest, they have been defeated. That even happened in Copeland, where the shortlist was drawn up by Corbynites and designed to advantage Rachel Holliday, the leader’s office preferred candidate.

Why does the Labour left keep losing? Supporters combination of bad luck and bad decisions for the defeat.

In Oldham West, where Michael Meacher, a committed supporter of Jeremy Corbyn’s, was succeeded by Jim McMahon, who voted for Liz Kendall, McMahon was seen to be so far ahead that they had no credible chance of stopping him. Rosena Allin-Khan was a near-perfect candidate to hold the seat of Tooting: a doctor at the local hospital, the seat’s largest employer, with links to both the Polish and Pakistani communities that make up the seat’s biggest minority blocs.  Gillian Troughton, who won the Copeland selection, is a respected local councillor.

But the leadership has also made bad decisions, some claim.  The failure to get a candidate in Manchester Gorton was particularly egregious, as one trade unionist puts it: “We all knew that Gerald was not going to make it [until 2020], they had a local boy with good connections to the trade unions, that contest should have been theirs for the taking”. Instead, they lost control of the selection panel because Jeremy Corbyn missed an NEC meeting – the NEC is hung at present as the Corbynsceptics sacrificed their majority of one to retain the chair – and with it their best chance of taking the seat.

Others close to the leadership point out that for the first year of Corbyn’s leadership, the leader’s office was more preoccupied with the struggle for survival than it was with getting more of its people in. Decisions in by-elections were taken on the hop and often in a way that led to problems later down the line. It made sense to keep Mo Azam, from the party’s left, off the shortlist in Oldham West when Labour MPs were worried for their own seats and about the Ukip effect if Labour selected a minority candidate. But that enraged the party’s minority politicians and led directly to the all-ethnic-minority shortlist in Manchester Gorton.

They also point out that the party's councillor base, from where many candidates are drawn, is still largely Corbynsceptic, though they hope that this will change in the next round of local government selections. (Councillors must go through a reselection process at every election.)

But the biggest shift has very little to do with the Labour leadership. The big victories for the Labour left in internal battles under Ed Miliband were the result of Unite and the GMB working together. Now they are, for various reasons, at odds and the GMB has proven significantly better at working shortlists and campaigning for its members to become MPs.  That helps Corbynsceptics. “The reason why so many of the unions supported Jeremy the first time,” one senior Corbynite argues, “Is they wanted to move the Labour party a little bit to the left. They didn’t want a socialist transformation of the Labour party. And actually if you look at the people getting selected they are not Corbynites, but they are not Blairites either, and that’s what the unions wanted.”

Regardless of why, it means that, two years into Corbyn’s leadership, the Labour left finds itself smaller in parliament than it was at the beginning.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.