The bit they didn’t fix in Basel

We may have stiff new rules on banks’ financial ratios, but SIMON THOMPSON draws his own conclusions about the real challenge – how to husband our human capital.

So, that’s all right then. We can, I read, breathe a unanimous sigh of relief. The Basel Committee on Banking Supervision, all 27 member nations, finally agreed a complex formula to forestall another financial meltdown by effectively requiring banks to triple core Tier One capital ratios from 2% to 7% by 2019.

Global equities rose on the news. The Vix Index – that endearingly-named investors’ ‘fear gauge’ – fell to its lowest level for months. Commentators, regulators and industry groups hailed the agreement as ‘a vital step’ towards avoiding another global shock without endangering today’s fragile recovery.

There seems to me to be two sound reasons to be cautious about these celebrations. The first is purely technical. The new capital requirements look steep – until you recall that the US Lehman Brothers, the Belgian-French Dexia and other banks held significantly greater capital ‘buffers’ than the new requirements. And they still went under or had to be bailed out.

This surely demonstrates that strengthening capital ‘buffers’ alone won’t solve the problem. What really brought them down was a combination of poor management and lousy lending. Bad decisions again will be perfectly capable of wrecking even these new financial ‘buffers’.

And that’s the second reason for caution about life beyond Basel 3: it’s not just the financial capital that needs replenishing; it’s the human capital we need to fix. What we learned from Basel 2 – and may well be fated to learn again – is that any regulations designed to make banking safer create their own human incentives for circumvention.

That’s exactly why we need to fix the bit Basel 3 ignored, the human capital. We simply can’t delegate all responsibility for banking stability to the regulators. Ultimately, it’s the responsibility of those managing the banks themselves to ensure they’re well run and adequately capitalised. And the responsibility of regulators and professional bodies to ensure those managers understand and can meet their responsibilities.

In the end, this is an objective rooted in ethics, not technicalities. We need the people who lead banks to demonstrate that we play by the rules, rather than living by the clever loopholes. 

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