The Empire Strikes Back

by Shane Fitzgerald

“Look, I ain’t in this for your revolution, and I’m not in it for you, princess. I expect to be well paid. I’m in it for the money.”
— Han Solo, Star Wars: A New Hope

Avinash Persaud, chairman of the Warwick Commission, whose 2009 report on international financial reform was one of the best to come out of the financial crisis, has a short article up on VOXEU dealing with the key policy responses to date.

“The Empire Strikes Back” argues that:

despite appearing to be down and out, the banking lobby has struck back, successfully making the case that all of these initiatives should be postponed or phased-in between 2015 and 2019. By then the pressure for regulatory reform could be a distant memory. Financial regulation veterans will be experiencing déjà vu. In each of the last seven international financial crises, plans for a radical shake up of international regulatory or monetary arrangements made surprising progress, only to be tidied away and stuffed in the bottom drawer once the economy recovered.

Meanwhile, over at his BBC blog, Robert Peston has been reviewing the agreement of “the most important global initiative to learn the lessons of the 2008 banking crisis and correct them” to date, namely the agreement of the new Basel III rules on banking supervision last weekend. Peston vents his frustration on two fronts. The first is that this crucial decision was not publicised and debated more widely outside the specialist financial press. After all, he argues:

If we want to avoid future financial crises that impoverish us all, we’ve got to pin our hopes on the effectiveness of these new rules … And, by the way, whether the rules work or not, they’ll have an effect on the price and availability of credit … So if you can find me many stories in the past few days or months that matter as much, then I’ll acknowledge I’m living on a different planet from you.

His second, much more troubling concern is about the likely impact and efficacy of the new measures on the ground.

Like Persaud, he fears that regulators and central bankers have again been bullied by the awesome might of the global banking lobby into a lackadaisical response to financial catastrophe. His piece touches on the opacity and incrementality of many of the new measures but his most compelling point concerns “the one new rule that might have acted as a serious permanent dampener on banks’ tendency to irrational exuberance, namely a new non-risk-based leverage ratio.” This, Peston argues:

… is being set at a level that will continue to allow banks to lend mind-boggling and record amounts (by all historical standards) relative to their capital resources … It allows banks to be prone to bankruptcy from a 3% fall in the value of their gross assets – which does not seem altogether prudent.

What’s more, the Basel Committee members could not even agree among themselves … to make this relatively loose constraint obligatory for all banks: it’s only an intention to make it such on 1 January 2018, subject to testing its impact in a “parallel run period”.

With the FT reporting that investors “breathed a sigh of relief that there were no unpleasant surprises in the Basel III rules” and the WSJ trying to insist that the new regulations are “tougher than they seem”, it is clear that proponents of radical reform have lost this major battle. This should not be surprising, as even the elected officials in charge of regulating financial markets in Europe acknowledge the effective absence of such proponents from international negotiating tables.

A group of MEPs and other European parliamentarians recently drew attention to “the pressure exerted by the financial and banking industry to influence the laws governing it”, going so far as to say that the “asymmetry between the power of this lobbying activity and the lack of counter-expertise poses a danger to democracy” and must be tempered by a much more clamorous and coherent civil society contribution to the political process in this area.

This relates back to Peston’s first point. Currently there is plenty of anger at the banks but little by way of organised, publicised opposition to the path of regulatory reform on which we have embarked. Revolutionary reform won’t happen in a political vacuum. Its advocates need not just the oxygen of publicity, but the fuel of expertise, resources and access if they are to thrive.

As any Star Wars fan will tell you, challenging the supremacy of a resurgent empire requires a strong rebel alliance, a great deal of goodwill and some well-channelled force.