Banks and rules, the english bell tolls

An important lesson could come from the United Kingdom concerning banks and rules: without waiting for the Americans, find the rules to reduce the possibility that excessive risks in non-banking finance could once again cause collective damage to the banking system and to the economy. If the English bell tolls, it could also be for Europe and Italy, if only we want to hear it.

The government in the United Kingdom seems determined to start a reform that should make the principle of a separation between commercial banking and investment banking operative, in order to reduce systemic risks. This news is interesting, as it shows that a nation does indeed exist that at least shows the will to overcome the stalemate in the reform of the rules. For various reasons this reform of the rules is today featured in the United States as well as in the European Union.

The fact is that the financial crisis has shown that the system of rules based on the principles of Basel II has failed. The architecture of Basel II had the aim of obtaining financial stability through the respectable cross of three different options, respectively exercized through a prudential regulation, based on capital coefficients: through surveillance; through the market. It is obvious to everyone that the Basel II device becomes an easy lock to pick when the leading country of the worldwide financial industry puts three lethal acids in it: the excess of private borrowing, in turn fueled by non-banking finance and by the monetary policy.

The mechanism is not hard to forget. The bipartisan objective of the American economic policy of the last two decades has been to allow the debt of all the operators to increase: families, enterprises and brokers. In order to allow the debt to increase, two ingredients are needed. First of all low and stable interest rates are needed; the FED led by Alan Greenspan has been an extraordinary executor, thanks to the fact that the growth of consumption prices did not seem to resent the systemic liquidity growth.

Second of all a financial deregulation was needed, so as to eliminate all the restrictions to the individual choice to run into debt. Congresses, Presidents and control authorities, have each contributed to the non-regulation. The uncontrolled and complicated development of private borrowing has also received an important contribution from the abolishment of separating investment banks from commercial banks.

The three acids have therefore destroyed the construction taking place in the architecture of Basel II. With the uncontrolled and incomprehensible development of private borrowing, the financial dullness increases exponentially and it is even more probable that individual bankruptcy could very well become the weak link in the chain that causes the systemic crisis. The dullness jeapardizes the effectiveness of the market discipline, it thwarts the effect of the capital coefficients – whose level is no longer important – and allows the guards captured by the financial and political lobbies to not notice anything, thereby thwarting the discipline concerning supervision. This is exactly what happened. During the crisis, the acids have continued to be injected: the monetary policy could not be expansive, in order to avoid even more serious systemic problems, and the investment banks have actually been given access to refinancing with the FED.

As soon as the crisis is over, the rules against excessive private borrowing should be written. But the United States cannot afford this today. So on behalf of coordinating the reform of the rules – a kind name to indicate the domination of the interests of Anglo-Saxon finance over all the others – a sort of conservative restoration of the prudential surveillance was carried out, which was then named Basel III. A conservative restoration which the European Union is trying to accelerate, in spite of all the useless local expediencies – above all from politicians, authorities and German banks – being carried out.

But the fundamental problem of an excessive dull lever remains, which has become awkward and dangerous. Just like the American drift which the Dodd-Frank reform, rich in principles but poor in solutions, allows. The English government is not able to face the funaamental problem either and announces the partial restoration of structural surveillance. In principle, it is difficult to say how effective the conservative restoration of prudential surveillance could be with respect to the partial restoration of the structural surveillance. One thing is certain: after three years of talking, a bell that tolls could be something new.
(Translation by Sara Cecere)

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