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Rising trend of casino banking

They may have formed the world’s most powerful financial forum, G-20, but how effective is their writ to discipline global banks and financial institutions? Hardly much. After the Bank of England, apparently under pressure from its large banks and financial institutions, sounded the impracticability of the Basel III norms at a recent meeting of world central bankers in the US, it is now the turn of the US Federal Reserve to officially postpone the Basel III implementation schedule, albeit indefinitely, starting 1 January 2013, presumably at the behest of its global banks as well as smaller community banks. 

Global banks obviously have more clout than their national governments when it comes to dealing with regulators. Take, for instance, the on-going investigations against illegal and unethical practices by banks such as HSBC and StanChart and ‘casino banking’ by many others. Banks are allowed to get away with small penalties while those rogue bankers and board members go scot-free.

Thanks to the USA and the UK, the world’s top two financial services giants, Basel III will certainly miss its 1 January start deadline, throwing its future uncertain. The failure of global governments to implement Basel II, which was primarily responsible for the western world financial collapse of 2008, and the rising trend of ‘casino banking’, led to the formulation of stricter Basel III norms. The latter was approved by the G-20 at its Seoul conference in 2010. The G-20 consists of the heads of 19 governments plus European Union, their finance ministers and central bank governors. Indian Prime Minister Manmohan Singh was among the signatories of the Seoul resolution on Basel III. The heads of 18 other countries who put their ‘seal’ on the Seoul statement were from the US, China, Japan, Germany, Russia, France, UK, Italy, Brazil, Canada, South Africa, Indonesia, Saudi Arabia, Australia, South Korea, Mexico, Argentina and Turkey.

With such heavy weight governments as those of the US, UK and EU seem to have already aligned with their powerful bank bosses on the ‘impracticability’ aspect of stringent Basel III norms, it may not be too early to surmise the failure of the Seoul summit to discipline the global banking system. The G-20 economies account for 80 per cent of the world gross product (WGP), 80 per cent of the world trade and two-third of the global population. The latest US decision to delay Basel III norms indefinitely does not augur well at least for the financial security of citizens of the world. Western governments had since 2008 pumped in close to $1.5 trillion to save their investment banks as well as economies from collapse. But, they don’t seem to have learned much from the financial crisis, mainly due to high risk banking and poor asset quality. They are still dragging their feet on taking appropriate measures to prevent similar or even much worse situations in future.

Two of the several key reasons for 2008 bank collapse were bank management-auditor nexus, which presented year after year unreliable balance sheets and unreal picture of their liabilities, and ‘casino banking’, especially by big global banks. Casino banking is a practice mastered by big public banks to indulge in unduly speculative or risky financial activities for high profits. Although every government  and central bank governor denounce ‘casino banking’ in public forums and suggest that regulated mainstream banking for economic development be separated from freewheeling speculative or high risk banking, no western economy is known to have made any serious attempt to divide the two areas of banking operations. Simply put, the comprehensive Basel III norms, which now stand almost sabotaged, are all about the agreement by the Basel committee on banking supervision to rules outlining global regulatory standards on bank capital adequacy and liquidity. The new rules require financial institutions around the globe to hold more and higher quality capital, introduce a global liquidity framework and introduce a countercyclical capital buffer. Banks have termed them as more complicated for judging risks than those provided under Basel II norms. Basel III implementation carries significant costs which most big banks are unwilling to bear. Banks feel that the Basel III approach will make securitisation particularly hard especially in the short maturity instruments such as credit cards and auto loan.

According to India’s central bank, RBI, Indian banks would not have a problem in adjusting to the new capital rules, both in terms of the quantum as well as the quality. Quick estimates suggest the capital adequacy of Indian banks under Basel III norms would be 11.7 per cent, compared with the required capital to risk (weighed) asset ratio of 10.5 per cent under the Basel III norms. However, some developed and emerging economies follow stringent norms to maintain a higher capital base.
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