Why Bankers Hate Basel

More

In a new column for Bloomberg View I argue that the banks' resistance to much stricter capital requirements is both wrong and dishonest: Real Reasons Bankers Don't Like Basel's Rules.

[Bankers] are being disingenuous. They do have reasons, valid after a fashion, for opposing higher capital requirements, just not reasons they can admit. The one they emphasize -- cost of funding and its effect on future lending -- is fit for public use, but bogus.

What might their real reasons be? If banks sell more shares, it's true that the return on equity will fall. If managers' pay is tied to return on equity (as it often is), they will be worse off. Shareholders, on the other hand, shouldn't mind, because the risk of their investment is reduced in proportion. Taxpayers, of course, would be better off -- less likely to be stuck at some point with the cost of bailing out the bank.

In other ways, the undeclared interests of bank managers and shareholders are aligned. The U.S. tax code, for instance, strongly discriminates in favor of debt and against equity. (Interest payments are a deductible business expense, whereas dividends and capital gains are taxed.) If you force banks to raise more equity, you reduce the value of this implicit subsidy.

Curbing the benefits of both kinds of subsidy -- the tax preference granted to debt, and the likelihood of a bailout if the bank fails -- would be bad for bank shareholders and managers and good for taxpayers. So let's be clear: What banks really dislike about the proposed new rule is that it limits their access to handouts from the rest of us. You can understand their reluctance to say so.

When the Basel III rules are eventually phased in, the biggest US banks might face a capital requirement of 10 percent. The banks are squealing at this prospect. What should the requirement be? At least double that, for reasons the column explains.


Jump to comments
Presented by

Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

Get Today's Top Stories in Your Inbox (preview)

The Time JFK Called the Air Force to Complain About a 'Silly Bastard'

51 years ago, President John F. Kennedy made a very angry phone call.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In