About Those Basel Accords & The Financial Crisis

George Melloan, a former Wall Street Journal columnist and editor, wrote a thought-provoking editorial in last weekend's edition of the paper.

Entitled "The Lesson of Basel's Bean Counters," Melloan's piece is a timely reminder that Basel's various accords afforded exactly zero systemic protection in the event of the actual financial dislocations of the past several years.

Melloan points out that Japanese banks, well-capitalized by Basel standards in 1990, never the less led the Japanese financial sector and economic collapse.

Lehman Brothers, he notes, had "close to triple the core capital required by the Basel standards when it crashed."

Mr. Melloan ends his piece with these passages,

"An assessment of Basel III is provided on the Web site of a London based organization called the Asymmetric Threats Contingency Alliance (ATCA), which came into being in 2001 to promote online discussion of global issues. It concludes, quite plausibly, that "Despite promises that regulators will be vigilant and central bankers more watchful, banks are certain to get into trouble again, as they always have throughout history. The way to protect taxpayers, the Basel III argument goes, is to compel banks to have buffers thick enough to withstand higher losses and longer periods of extreme volatility in financial markets before they call for government intervention."

As the ATCA paper notes, in the days before banks could rely on governments to save them they carried large capital buffers, with core capital sometimes as much as 15% to 25% of assets, as opposed to as little as 2% under current rule. Of course, that made banking more expensive, and bankers were choosier about risks than in today's world, where the U.S. government has chosen to treat some banks as worthy of taxpayer help because they are "too big to fail."

One thing seems certain, the promise of bailouts and better regulation is unlikely to restore better risk judgment to the profession of banking. The opposite is more likely."

Perhaps, before the US Senate and House pass FINREG, or anything like it, with its 1,336 current pages, cooler, wiser heads should consider Melloan's points. Even the decades-long Basel I, II and III accords have been unable to prevent a near-total, global financial meltdown.

If you were to ask me, I'd say less regulation and higher core capital levels on the order of 20% would do a great deal more to avoid, or mitigate, the next, inevitable financial crisis.

Sure, this will make banks less 'hot' in the sense of total return growth. But, in reality, banking has never been the kind of business which lends itself- pun intended- to the sorts of total return performances over time of an Apple, Google or even Home Depot.

Banking is a derivative business. It facilitates societal transaction, wealth transfers and accumulations. But it doesn't exist as and for itself.

I'm not sure banks should ever have become publicly-listed and -traded equities. But, having become so, they really should function and perform more like energy utilities, less like high-flying growth companies.