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04 November 2016

Financial Times: Basel provides the background noise for the next crisis

A lot of financial people are worry about the meeting of the Basel Committee on Banking Supervision on November 28 and 29. The committee is scheduled to agree a “standardised approach for credit risk” and impose limits on the use of internal models.

The idea is that banks in the G20 countries, a group of the world’s most powerful economies, will not engage in regulatory arbitrage, or international game playing that results in a lowering of credit standards.

Sounds nice, right? Then in meetings in Basel on January 9 and 10 the governors of the Bank for International Settlements, the global institution owned by central banks, along with the various national bank supervisors, is supposed to affirm the decision of the Basel Committee.

This should all have been a worthy and dull affair. Instead, the standardised approach for credit risk is turning into an issue so contentious that it could lead to a severe break in co-operation between the US (and other Anglos), Europe and Japan. That will not be good background noise for the next crisis.

It is also bad news for project lending. If you are a politician, “project lending” sounds like some risky bank thing, but think again. The political class across the low-growth world is calling for the public and private sector to co-operate for “infrastructure” development. In much of the world, revenue-producing infrastructure, such as toll roads, airports, pipelines or power grids, is financed through project lending led by banks.

The specific point of contention is whether the G20 banks should be able to use their own internal risk models to determine how much of their own capital they should set aside for a given type of lending or securities. US regulators seem to hate models. They think that there should be one range of risk weights for any class of lending, such as project finance.

European politicians have begun to understand that the Basel Committee is heading in the direction of cutting their banks’ financing of infrastructure development. Not popular. As one American says: “There is probably a 50-50 chance the Europeans walk away from Basel.”

Full article on Financial Times (subscription required)

© Financial Times

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