The Threat To Global Banking Standards

LONDON – The financial crisis of 2008 gave a big boost to the global standard-setters. Suddenly, the Basel Committee (which sets the standards for international banking supervision) was leading the financial news. Dinner parties in Manhattan and Kensington were consumed with the finer points of Basel II and the evils of procyclical capital requirements. Governments that had been suspicious of international interference were eager for tougher global rules to prevent banking crises from spilling across borders and infecting others, like bouts of Asian flu.

The concrete consequences of this enthusiasm were the creation of the Financial Stability Board (FSB), born out of the ashes of the Financial Stability Forum, at the G20’s London summit in April 2009, and inclusion of representatives of all G20 members among the key rule makers in Basel and elsewhere. The G7’s domination gave way to the hope that broader membership would produce more comprehensive buy-in and stronger political support for increasing the banking system’s capital.

All this change has worked, up to a point. The Basel III regulations, for example, more than doubled the capital an individual bank should hold, and enhanced the quality of that capital. The system looks somewhat safer as a result. But now there are dangerous signs that the commitment to stronger global standards – indeed, to any common standards – may be on the wane.

Many predicted this trend, but for the wrong reason. Skeptics warned that it would be far harder to reach agreement among 20 or more countries than it had been among the dozen pre-crisis Basel Committee members (mainly European countries, with only the US, Canada, and Japan representing the world beyond). In practice, that has not turned out to be a major problem. Basel III was agreed far more quickly than Basel II was. Political pressure from finance ministers, expressed through the FSB, proved effective.