Irreverent Economics

The FT reports that banks are actively lobbying against new rules on bank capital.  The report islight on detail, but demonstrates how short a memory the banks have.

Over the past 150 years bank capital has been steadily decreasing, as the following graph, obtained from a good paper by Alessandri and Haldane, called “Banking on the state“.

Before the crisis,  impressive amounts of financial engineering were used to make sure that bank capital appeared to be considerable, while in actuality it was very little. Things like hybrid instruments turned out to have somewhat lower loss absorption than envisioned. After all, why would the banks sell them to their best clients if they were  actually meant to absorb losses?

Furthermore, many of the banks with the highest amount of capital under Basel II,  turned out to have some of the lowest under the American leverage ratio.  The financial engineering premium at work.

In the crisis, the markets rightly became skeptical about the quality of bank’s capital, and started focusing on core tier 1 capital,  disregarding all the other parts,  especially the tier 2 stuff.

One would think the it should be in everybody’s interest for banks to keep adequate capital. But the banks seem to be lobbying against the reforms, making statements such as this from the FT

BNP Paribas, the country’s biggest bank, warned recently that the Basel III reforms would cost European banks €400bn ($540bn) in extra capital and force them to issue €1,500bn in debt to finance lending.

Yeah right.