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Issue #1474      29 September 2010

Banking regulation off the agenda

Way open for next crisis

When governments stepped in during the global financial crisis to bail out the world’s largest banks and spent billions of dollars of taxpayers’ money on stimulus packages, it looked as though the financial system would be subjected to greater regulation and accountability. Leading capitalist economists were amongst those questioning the wisdom of neo-liberal financial deregulation and privatisation. There was talk in G20 government circles, the largest economies in the world, of an overhaul of the banking system.

The calls for reform were far stronger than the previous demands for a new “global financial architecture” that had been heard during the 1997 Asian financial crisis. Former US Federal Reserve Bank chief Allan Greenspan, previously unquestioning of the wisdom of the “free market” gods, was one of a number of neo-liberal fanatics who began to question their faith.

The Asian financial crisis was triggered by the speculation and manipulation of currencies and capital and share markets, made possible by IMF/WTO liberalisation. Countries like Thailand, Malaysia, Taiwan, Hong Kong, South Africa and Brazil felt the full brunt of the powerful, global speculators, in particular, the unregulated hedge funds.

Governments, such as in Malaysia and Russia, who took regulatory measures to protect their currency and capital flows were viciously attacked by the big Western financial institutions and their governments.

But the Western world was forced to take matters more seriously when crisis hit a major US hedge fund in 1998. Financial institutions, under the leadership of the US Federal Reserve Bank, stepped in to bail out Long Term Capital Management (LTCM) in September 1998. The collapse of LTCM exposed the huge scale of hedge fund operations and the potentially destabilising effects of their rampant speculation on deregulated financial and capital markets.

With a capital base of some US$4-5 billion, LTCM had obtained loans of up to US$200 billion and used these to place positions in financial markets worth $1.3 trillion – i.e. it could have lost $1.3 trillion! Hedge funds like LTCM operated with impunity, beyond the scrutiny of regulators, exerting considerable influence over interest rates, currencies and other financial assets (eg shares, derivatives, bonds) and commodity prices.

The LTCM collapse led to the Basel Committee for Banking Supervision (BCBS) commissioning a study on the speculative institutions. Its Report on Highly Leveraged Institutions, warned how hedge funds and other high-borrowing institutions could put the world economy at risk. The BCBS is a committee of the Bank for International Settlements*, which dictates the rules for international banking. It represents and protects the interests of the largest banks.

The BCBS’s warnings did not result in any action to curb the system of floating exchange rates and/or impose government controls over capital movements (including loans). The World Bank and IMF continued to pressure third world countries to deregulate their financial systems and float their currencies, policies that removed government controls over important economic policy and strengthened the hand of the major Western banks.

Then, in 2008, the global financial crisis hit, and trillions of dollars were required in government bailouts and stimulus packages to save the global financial system and national economies from systemic collapse. This time the calls for regulation were louder and some of the leading representatives of capital began to question neo-liberal deregulation.

Even more dangerously, for the big end of town, ordinary working people were questioning the capitalist system itself. Some governments introduced minor reforms, but the powerful finance sector lobby made sure nothing of substance that might interfere with their operations was passed.

Now, two years on, the talk has moved on from overhauling the banking system to restoring budget deficits, repaying government debts and preventing a double-dip recession. The Bank for International Settlements released a statement on September 13 (2010) following a BCBS meeting of central bank governors.

This statement reports on a new agreement for reforms to the banking system – Basel III. The agreement is for banks to operate with higher minimum capital requirements and new counter-cyclical “capital buffers” (higher levels of capital holdings during pre-crisis booms) to “ensure banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”

“… the aim is to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy without its solvency being questioned, when the broader financial system experiences stress after a period of excess credit growth,” the BIS statement said.

Under Basel III, banks that do not already meet new minimum levels of capital and liquidity will have until 2019 to phase them in. Many of the larger banks, including those in the US, already meet Basel III’s requirements. It will not affect them and it won’t prevent another financial crisis. As one commentator noted, the now defunct Lehman Bros bank met the new rules before its collapse.

It could have an impact on smaller banks attempting to increase their reserves. They would be forced to tighten credit and increase interest rates, hitting their customers who are mainly small business and the community sector. The big end of town would not be affected. It will strengthen their hand, possibly resulting in more takeovers and crashes of the smaller banks and further global monopolisation of the sector by the big sharks of the industry.

Basel III falls far short of the “banking overhaul” promised a few years ago by the G20.

Individual governments daring to impose currency controls, restrictions on capital flows or foreign loans will see their economies savagely attacked and ravaged by flights of capital, credit squeezes and downgrading of their credit ratings by the private agencies to junk ratings. Not surprisingly the big banks and their hedge fund friends are pleased with the outcome of Basel III.

Basel III will be presented for adoption by governments at the G20 meeting in November and its proposals then converted into legislation at the national level by those countries.

The G20 had discussed proposals at its meeting in April for the imposition of a levy on banks which would not only increase government revenue but force banks to at least partly bare the brunt for bailouts (at present carried by taxpayers – workers in particular). This met with considerable opposition, led by Australia and Canada on behalf for the bank lobbyists, and got thrown out. Something we can thank Kevin Rudd for when the next crisis hits.

And it is only a matter of time before the next financial crisis hits and thousands more victims lose their homes, jobs, businesses and governments step in to bail them out with taxpayers’ money.

It is outrageous that they can continue business as usual, in a deregulated financial environment, standing over governments and raiding the public purse when they bring on a crisis.

This situation cannot end without regulation of currencies, interest rates and capital flows. Governments are expected to pick up the pieces but have no control over the basic economic levers that could prevent or soften financial and economic crises.

As a first step, the Communist Party of Australia is calling on the Australian government to establish a People’s Bank, a government guaranteed public bank that operates in the interests of the people and the economy.

It is time for a People’s Bank, a regulated financial system and higher taxes on banks and other financial institutions.

* The Bank for International Settlements is an international financial organisation based in Basel, Switzerland, for international monetary and financial cooperation and serves as a bank for central banks. It was established in 1930. The Reserve Bank of Australia participates on its committees which set guidelines and rules to be followed by the banks and acted on by governments. 

Next article – Lilydale – free-range chickens, caged workers

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