Why Bankers Hate Basel

By Clive Crook

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.


This article available online at:

http://www.theatlantic.com/business/archive/2011/12/why-bankers-hate-basel/250367/