“If thought corrupts language, language can also corrupt thought,” wrote George Orwell in his celebrated essay Politics and the English Language. “A bad usage can spread by tradition and imitation even among people who should and do know better.”
When debating what to call the reforms the Basel Committee on Banking Supervision is negotiating, bankers and regulators may at least agree that Orwell has a point, even if they disagree over which side is abusing the language.
For some time bankers have used lexicology as a tool to bash the “finalisation” of the Basel III regulations by dubbing them Basel IV, to indicate their belief that the reforms represent a stealthy hit-and-run by regulators.
The new plans aim to make banks assess the risk of the assets they hold in a more homogeneous manner. This involves calibrating a capital output floor, the maximum ratio allowed between the measure of a bank’s risk-weighted assets as calculated by a standard model, and the measure as calculated by the bank’s internal models.
Now the Banque de France has weighed in on this seismic semantic debate.
In a presentation last week, the central bank appeared to indicate that a 70% floor, which it says would constrain a quarter of international banks, would represent the finalisation of Basel III. However, if the floor were set at 75%, which it says would constrain half of international banks, this would mean we were stepping into a Basel IV world.
It left GlobalCapital wondering where a 72.5% floor — recently mooted as a compromise solution — would leave us.
In setting out this distinction, the Banque de France has departed from other regulators who refuse to utter the IV word. It is another sign of a certain Gallic intransigence on the issue. Earlier this month, France’s finance minister Bruno Le Maire said the country would oppose any increase in banks’ capital requirements.
But more relevant than the specific level of the output floor is just how long it will actually take to get an agreement. It is hard to maintain the idea the reforms are simply a “finalisation” if the first agreement was made so long ago that few people remember its original formulation.
The original version of Basel III came out in 2010. David Cameron and Barack Obama were in their first terms of office, European banks could still gloat that its sector had weathered the crisis better than that of the Anglo-Saxons, and Donald Trump had revealed he was considering running for the White House in 2012.
Even the “finalisation” proposals are based on impact studies on end-2015 balance sheets. Pushing whatever one calls the new package into next year will mean a whole new set of impact studies, in order to keep proving that it won’t raise bank capital requirement overall.
The longer the Basel process is dragged out, the further away from the crisis we will get, and the more complacent policy makers will feel about capital regulations.
If increased nationalism among elected politicians filters through to regulators, cross border agreements are set to become more and more difficult. Basel III or Basel IV — time to get on with the job.