BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Basel allows banks to play the same dangerous game

Robert Peston | 08:12 UK time, Monday, 2 August 2010

Before you read on, do me a small favour and click here [46.18KB PDF].

Screenshot Basel documentIt's last week's publication from the Basel Committee on Banking Supervision outlining some amendments to the initial proposals put forward at the end of last year to strengthen banks in the wake of the 2008 financial meltdown.

Now I would hazard that even those of you who work or have worked in the banking industry would be nonplussed by much of it.

As is the norm for the Basel Committee - the supreme global decision-making body for banks - the concepts are complex and the language is highly technical.

For most of us, it's an impenetrable document in a mysterious foreign language.

Perhaps that's inevitable.

But just pause for a second. What happened in 2008, the collapse and rescue of the worldwide banking system, touched all of us: it turned a gentle recession into the worst recession since the 1930s; and we'll be living with the consequences, in the form of lower growth and squeezed living standards, for years.

Now imagine that the equivalent disaster had occurred in the airline industry, that almost every aeroplane came within a few seconds of dropping out of the skies.

In the aftermath, and however complex the engineering of a plane may be and irrespective of the intricacies of traffic control, the effort to mend and reform air transport would be conducted in full public gaze, using ideas and phrases understandable to all.

As citizens, we wouldn't tolerate anything else - and nor would politicians and regulators believe for an instant that they could get away with stitching up some ostensible solution in private.

So what is it about banking regulation that makes it inappropriate for discussion in front of the children?

Are banks intrinsically harder to comprehend than modern, computer-controlled aeroplanes? That would be difficult to argue.

Are banks less important to us? Well, few people die instantly when a bank crashes. But when a financial system crashes, and the world becomes poorer, vast numbers of people suffer - and some would indeed die, if the resources available for medical care were to contract.

It is therefore odd that the future of banking is being decided as it has been done for more than 35 years, behind closed doors in the quaint Swiss town of Basel by a committee of unelected central bankers and regulators.

The consequences of carrying on like this will be profound.

For example, it's all very well for the government and the Financial Services Authority to demand that non-executive directors of banks and shareholders in banks must be far better informed about the risks being run by their respective banks - and must be prepared to veto dangerous behaviour by those banks - but how can they exercise that responsibility when it's unlikely that they will understand even a fraction of Basel's rules for measuring and controlling risk?

So the clever clogs executives who run banks will be able to carry on as they have been doing for the past 30 years of globalised financial capitalism, which is to see the Basel strictures as the rules of a game to be exploited for vast profit.

It is inevitable that in any rulebook as long and complex as Basel's that there'll be loopholes and sloppy drafting and great unintended gaps. Banks will deploy their capital where the Basel rules understate the true risks, because that's where the highest rewards are to be found - and of course it'll take the regulators, and shareholders and non-executive directors too long to work out that they've been had.

It's what happened on a massive and devastating scale after the Basel l and Basel ll rules were introduced: banks engaged in too much property lending, in excessive off-balance sheet funding, in far too much lending to each other, in far too much investment in AAA rated securities manufactured out of subprime loans, because these were areas of activity either wholly ignored by the Basel rules or where the risks were not captured by the rules.

Inevitably, there'll be similar consequences from Basel lll, the new code that will determine how much capital banks must hold as protection against losses, how much cash and liquid resources they must hold against the threat of runs, and what proportion of their loans and investments must be financed by debt and liabilities of longer maturity.

Here's the question: rather than a rulebook that'll be even longer than the so-called comprehensive version of Basel ll - which runs to 347 opaque pages - wouldn't it be far better to have some very simple easy-to-understand principles, that capture the spirit of the kind of risks that our society believes are appropriate for any institution that has been given the privilege of taking deposits.

Underneath these principles there would be more detailed rules, giving different risk weightings to different categories of loan, or deeming certain kinds of capital as more valuable and useful than other kinds.

But it would be breaches of the principles that would attract greatest punishment and opprobrium, so there'd be no defence for a bank or banker who pointed to the minutiae of the rules to justify loading up the balance sheet with dodgy investments.

Is there any chance of such principles being agreed? Probably not, because national governments are so fiercely protective of what makes their banks different from banks in other countries.

If anything, that's the big message underlying the gobbledegook in the Basel Committee document I made you read at the outset.

I'll translate three parts for you.

1) On the final page, there's a reduction from 100% to 65% in the "Required Stable Funding factor" for residential mortgages. That helps banks that rely heavily on wholesale funding - finance other than the deposits provided by you and me - to provide mortgages. It's a sop to Germany and the US, where mortgage providers are particularly dependent on such wholesale funding (and, as chance would have it, is also a great boon for the UK's Lloyds Banking Group).

2) On pages 3 and 4, it says that the implementation of a new leverage ratio - a ratio of gross loans and investments to capital - won't happen till 2018 and hasn't been formally agreed yet. That's a sop to France and its banks with their massive derivative exposures, which would otherwise need to raise vast amounts of expensive new capital.

3) Page 1 signals a victory for Canada, which wanted the capital provided by "minority" partners in banks' subsidiaries to be included in those banks' capital ratios. Canadian banks have a fair number of subsidiaries capitalised in this way.

Some would argue that all this national horse-trading is also leading to a very worrying retreat from plans to put much greater emphasis when measuring the strength of banks on the old-fashioned definition of capital, viz equity capital or shareholders' funds - under pressure from EU countries whose banks have far too little of such basic capital.

However there's a bigger point. Which is that we've probably lost the moment when it was possible to simplify banking regulation and sanitize the banking system.

Instead, regulators, central bankers and governments are patching up complexity. So, whether we like it or not, the rest of us will have to delegate even more responsibility in the coming years to the so-called experts at the FSA and in regulatory bodies around the world to prevent the system toppling over again.

Comments

Page 1 of 3

  • Comment number 1.

    Good, objective articles like this on this vital subject are essential - as national economies have become global, the vacuum that has developed developed where good governance or good self-regulation is needed will simply lead to another bigger crisis of banking boom and national bust. The banking industry has demonstrated that it is capable of nothing beyond grabbing maximum profit now, and let tomorrow take care of itself - the child in the sweetshop.
    A quote from another good recent article by Liam Halligan in the Telegraph ..."such is the lobbying power of the big Wall Street institutions that they not only caused a global economic crisis and then forced the US government to pay for a massive bail-out, but then used a slice of that bail-out cash to bribe politicians with campaign donations in order to block rule changes that might prevent a repeat performance.
    That leaves the politicians and high-flying bankers happy, of course, while regular citizens – and their children and grandchildren – foot the multi-billion dollar bill.
    The principal function of a financial services industry is to link savers with investors and creditors with borrowers, so facilitating broader commercial activity. Such intermediary functions are crucial to economic progress and can be the basis of a profitable and socially useful business.
    What we've created, instead, is a group of institutions that between them comprise nothing less than a financial oligarchy. These guys have Western taxpayers over a barrel".

  • Comment number 2.

    Nothing's changed then...and I'm not surprised.

    Shame, sigh, life goes on.

  • Comment number 3.

    As you so well put, Robert, "Here's the question: rather than a rulebook that'll be even longer than the so-called comprehensive version of Basel ll - which runs to 347 opaque pages - wouldn't it be far better to have some very simple easy-to-understand principles, that capture the spirit of the kind of risks that our society believes are appropriate for any institution."

    Ordinary people can appreciate and would indeed demand such a principle, if given some sort of referendum on this question. Rules are intended to capture a spirit. Often the spirit is about avoiding taking things to extremes in the pursuit of winning. In sport the equivalent would be, not deliberately injuring the best players on the opposing side.

    But these (useless) rules show how vital it is that we break up the banks, change their shares structures to Unlimited liability and even consider nationalising some.

    You notice in these new rules, nowhere will it say, that accepting taxpayer funded assistance is banned.

    If Basel 111 is serious and "will work this time" why is the Basel Committee not able to state that banks shall not accept taxpayer bailout in future? If they can't say this, why have BAsel?

  • Comment number 4.

    A most excellent piece of writing and exposition Mr Peston. Thanks.

  • Comment number 5.

    Not surprising that basically nothing has changed. Money rules and politics drools after all.


    So what is the speculation on the next great bank crash?

    Another 80 years or much sooner this time?

  • Comment number 6.

    > wouldn't it be far better to have some very simple easy-to-understand principles

    Before the usual bunch of banker sycophants turn up to soft soap us, let's make one thing clear - bankers are far too stupid to understand much of this stuff too. So it is useless.

    We need a simple device called "requirements-led legislation". We specify that we require bankers to provide a safe environment for our money system. If they fail to do so, they are stripped of their assets and sent to jail for a very, very long time.

    Right. That's solved _all_ our banking problems via moral hazard. End of.

    Now let's move on to the the other 99% rest of business that is not related to the schizophrenic, ego-centric, paranoiac, prima-donnas in the banking sector.

  • Comment number 7.

    Let's be quite clear here.

    Our government allowed unsustainable credit growth which apparently benefited everyone; the banks, the people, the government.

    In reality, the seeds for a recession which could be with us for a long time yet were being sown.

    When the bubble started bursting, the opportunity was there to nationalise the banks; instead, they were allowed to bankise the nation. We gave way to their blackmail threat to turn off the ATMs and bailed them out.

    The banks should have been assigned to their proper role; agencies or contractors to administer our currency. Instead, they now administer us; Basel is nothing more than a device to bankise the world.

    Because they have succeeded in putting the governments and the people into hock, they can do as they wish and they do.

    It will take generations to break out of our trap; the sooner we start the better before the BRIC countries get there first.

  • Comment number 8.

    I think we have to accept that if Basel III had introduced radical reforms immediately, the outcome might well have been renewed weakness within the financial system – to take up Mr Peston’s analogy, banks travel on a wing and a prayer, they really are fragile creatures.
    Basel III is so nonsensical, it is probable there has been a deal between central banks and the committee to hold fire until balance sheets have been strengthened, then reform can be implemented. After all, the issue is very straightforward notwithstanding the complexity of the Basel III text - asset trading, providing mortgages, arranging the supply of working capital and retail banking are four totally incompatible activities as I am sure everybody knows and understands.

  • Comment number 9.

    So what is the reason for what I take it may be characterised as the comparative failure of Basel, the failure of national governments to reign in the banks?

    It can only be that the large banks are more powerful than governments.

    That can only be because so many of each government’s citizens - the banks’ customers, both individuals and businesses - would be ruined by banks’ failures.

    And the reason for that? It could be because the banks are so intertwined that to bring down one brings down them all. Or it could be that some of them are so large individually that ‘they cannot be allowed to fail’ because that would ruin such a large number of their customers, the government’s citizens.

    I don’t know what could be done about the first possible cause. But the answer to the second seems obvious: break up the largest banks. Isn’t that what our Regulator, Mervyn King, suggested a year or two ago?

  • Comment number 10.

    Disturbing? Yes. Demoralising? Absolutely. In the least surprising? Not even a little bit. If we've learnt anything from the insatiable banks over the last several years, it's that any and every loophole, and fiscal nook and cranny, will be used to exploit regulations, invariably at the expense of Joe Public. To firmly rub in the salt, and with a cruel sense of irony, the self-same regs will then be cited to excuse and explain away said wrongdoing...the only question is, how long will it take for us to all end up here again, once House Of Cards v2.0 has coming crashing down?

  • Comment number 11.

    In 100 years time historians will look back in amazement that the ordinary working people allowed the banks - in cahoots with national governments - to repeatedly fleece them for their own gain. In less gentle times, there would be bodies swinging from lamp posts.

  • Comment number 12.

    Good article Bobby.

    We could stll split the banks up into smaller pieces.
    We could still start national banks and get new untainted competition in.

    I like the French, they are only ever interested in looking after their own. How can you blame them? But they should still be bullied -not accommodated- when they are wrong. 2018? You gorra be joking.
    I am sure some great writer had a phrase of disdain about the word 'consensus'. Applicable here.

    Regards,

  • Comment number 13.

    Sorry Mr. Preston you are altogether too polite about the Basle agreements. They have been a shambles and no one in the banking industry wants to be the first to say the emperor has no clothes. Allowing bankers to make their own rules is the first mistake - the rules are, as you said, impenetrable and so full of loop holes and off balance sheet options that you drive a coach and horses (with their bonus swag) through them. The rules conspired with official connivence (Greenspan, Bush, Blair, Brown et al) to create an unsustainable and concentrated banking system.

    No rules should be drafted in language that is beyond the wit of the man on the Clapham omnibus to understand - not even how to build a nuclear power plant. Bankers, on whom our economies depend, should return to banking and ye olde fashioned principles of banking. There is a place for the sub-primes, CDOs, securitisation etc. but not in the banking system and not when they are endowed with such leverage that these instruments put prosperity at risk.

    I KNOW you have to be objective Mr. Preston, but as a journalist you also have a duty to expose - can you please do that when the sequel to Basle III is mooted - as it will have to be?

  • Comment number 14.

    Very true and infuriating with it.
    But would you really have expected those with vested interests to have behaved any differently? Too much to lose I guess!

    A bit late now - there was already a drastic remedy to the pressure being exerted by the Banks. All banks have to be licensed to operate.
    Shame. The moment has passed.

    Seems the 'madness' described is catching judging by the article in the Telegraph today.

    With the financial services industry over-milking investments and especially pensions, now trying to prevent European fund managers from entering the market with higher returns at less cost to the investor!

    Is it just a lack of tougher regulations on fees and levies or is it just a British disease that Banks and investment companies are free to treat the investor/customer like an ATM?

    I guess for those that steal, to the Judge, its "sorry guv, i needed the money.." followed by three to six months inside.

    For the Financial sector, taking excessive fees, its a case of "these reflect our costs Mr Regulator sir" and the inevitable "tee hee, they fell for it" to their colleagues afterwards!

  • Comment number 15.

    Politicians leave office and move straight into the Boardrooms of the banks, bankers get peerages and move into the government...There will be no effective regulation of the banks as its just too easy for them to use the taxpayer to ride to the rescue, so, for the banks, you can rake it in when times are good and you never pay the price when it all goes wrong. All of the lobbying and back-room deals go on at a level far above that which the likes of us, who are footing the bill, have access to. Do any politicians even have the will to do it? What has really changed since 2007? What, if anything has been outlawed, made illegal?

  • Comment number 16.

    Much needed and well timed expose' Clearly the devils are behind this knotweed of rules and regulation and Robert's article shows how exposed we continue to be. Really it is every country for itself and UK should be prepared to 'suffer' the consequences of bringing in supervision instead of regulation, statute backed governance, well defined parameters for conducting business, adopting fiscal measure that regulate credit to individuals such as credit card minimum repayment, stringent rules on credit assessments for mortgages and other loans etc.

  • Comment number 17.

    We need international institutions like Basel. The problem is that because of the democratic deficit suffered by all of these international institutions, they get taken over by special interest groups.

    Robert Peston says "...So, whether we like it or not, the rest of us will have to delegate even more responsibility in the coming years to the so-called experts at the FSA and in regulatory bodies around the world to prevent the system toppling over again...."

    If you think about that from a politician's point of view, the banks will say that their national FSA (or whatever) should not regulate them too forcibly or they will be uncompetitive. That was already happening with the Gordon Brown government and it was cited as the reason Glass-Steagal was repealed under the Clinton administration.

    There does not have to be a way out of this. Not until we have some form of equitable world government. I do not particularly advocate that because at present governance and the quality of politicians is not even throughout the world. Indeed, there's a preponderance of corrupt elected officials when you look at the world in the round (or the sphere).

    Nevertheless, we will stagger from crisis to crisis until that happens, which I imagine it will someday.

    I doubt this will be the only area of crisis either. The world is becoming a small place run by even smaller local authorities.

  • Comment number 18.

    Great Piece and one of the few people who seems to understand that one of the main underlying causes of the crash was Basle II. If only the "experts" and politicians were the same.

  • Comment number 19.

    "For most of us, it's an impenetrable document in a mysterious foreign language."

    And as a public service broadcaster it is precisly the BBCs remit to decycpher, explain and publicise complicated and important issues to the mainstream audience.

    You've done a good job here, but your blog is not a mainstream audience.

    What obstacles are there to getting this on the ten o'clock news as item one or two ?

  • Comment number 20.

    Excellent Article. What is most important is that the article is seen by our politicians and other commentators. It should be widespread knowledge. Unless this happens, there will be the same old problems again. We have to stop the rot!

  • Comment number 21.

    The Banks have chosen not to reform in the ways that the Public are demanding that they do. In the real world - where people go out to work for a living and take responsibility for their actions - that would be held to mean that the Banks are accepting responsibility for their actions.

    So Banks, by failing to reform, are indicating that they accept the risks they have created are their own risks. The various sops in the document are to the Bankers based in various countries, not the taxpayers of those countries. Essentially, a country club organising the way the servants will deliver drinks.

    The time has come for the Banks to be reformed. They have failed to reform themselves. Appointing a few people from the middle management of, say, a light engineering firm or a delivery company to a committee with instructions to reform banking with a few break ups and nationalisiations would be a start. The Banks would immediately object that these "new boys" do not understand their business. Where the committee can respond: death does focus the mind, does it not?

    As a business model, banking has reached the end of its useful life. Basel x.x is equivalent to the miners demanding no pit closures. It is time for Governments to start the dirty, necessary work, of reforming the Industry that refuses to reform itself.

  • Comment number 22.

    The simplest piece of legislation we could produce to try and prevent a repeat of the banking crisis is to limit the function of banks that lend money at interest and provide bank accounts to individuals to those things only. How hard can it be to draw up a document that says exactly that?
    I'm quite happy for anyone who wants to gamble with derivatives or other exotic whatevers to do so; I would just prefer they didn't do it with money from the same "pot" that contains my savings account.
    Additionally, hopefully a "bank" that specialises in high risk investing but doesn't have it's hands on money owned by you and me can be allowed to fail, and we will not need to provide yet more of our own money in order to stabilise the economy.

  • Comment number 23.

    It should now be clear that it is the banks that govern the world, for the benefit of a very small minority, rather than national governments. As commented above, look no further than the ransom paid to banks during the last hiccup. You may be deluded into thinking that this was ok because we now own equity in the bank. However that equity is vapour.

    Basel III looks as though it will complete the sanctification of capital requirements based on credit created by the banks themselves. We have given the banks the ultimate power weapon, just write your own money, regardless of sensibility or any backing of substance.

    We allow this because this is war by other means. Unfortunately the buyers of this western debt have woken up to these battle tactics and will now (have been for some time) bolster their defences. China refuses to play the market game with their currency for example.

    The inevitable conclusion will be to delay the impact of western currency collapse but on the downside, when it comes, the catastrophe will be that much greater. Where are the men of substance to lead us out of this game? In the same swim as the banks.

  • Comment number 24.

    "The effort to mend and reform air transport would be conducted in full public gaze, using ideas and phrases understandable to all" - Okay, cleverclogs, explain the fault with RAF Nimrod aircraft which has been the subject of so many inquiries over the last decade. No takers? What, you say? You need to be an expert in jet engines to really understand the Nimrod problem? Ah, well then, Peston's analogy falls down.

  • Comment number 25.

    “You notice in these new rules, nowhere will it say, that accepting taxpayer funded assistance is banned”

    Why would governments want it banned when it can prove such a useful tool, notably at a time when they are showing paper profits on the likes of Lloyds and RBS.

    Just watch the investors dive back in when the treasury launches it’s first IPO.

  • Comment number 26.

    An excellent, well-written and highly informative article, Robert.

    Your calm, rational analysis of the challenges we face is a pleasure to read, and contrasts starkly with the mindlessly aggressive (and wildly uninformed) banker-bashing on the part of your regular contributors.

  • Comment number 27.

    US Federal Reserve head, Ben Bernanke added a disturbing footnote to his written evidence to the Committee on Financial Services back in February.

    He said: "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

    Full text can be found here: http://bit.ly/d480A9

    How would European banks remain competitive against a US system aiming to eliminate minimum reserve requirements?

    This con just gets bigger and bigger!

  • Comment number 28.

    "banks engaged in too much property lending"

    That is the key issue - all the other sub prime and derivative stuff simply followed on from the excessive property lending.

    The key thing that must be fixed is to make property lending less attractive to banks. As a consequence this will automatically make lending to small and medium sized businesses more attractive.

    Excessive lending to property guarantees that property prices will soar, and then inevitably crash, causing great harm to the economy and individuals along the way. The money lent to property could be far better used by small and medium sized businesses, with productive rather than destructive results.

  • Comment number 29.

    I'm sure banking bashing is a small price to pay for business as usual.

  • Comment number 30.

    The banks' argument against requirements for higher risk-capitalisation - "we won't be able to lend as much, and the recovery will suffer" - can of course be taken both ways.

    It works quite well as a reason for splitting retail from speculative operations: http://cityunslicker.blogspot.com/2010/08/banks-argument-cuts-both-ways.html

  • Comment number 31.

    All smoke and mirrors.

    The only thing keeping all the banks solvent is the support of housing prices brought about by the 0.5% base rate and the spread of around 4% between what the banks are paying lenders and charging borrowers.

    Until support of the house price asset bubble is removed (i.e. interest rates returning to more normal values or inflation increasing allowing property prices to revert to the more normal 3 - 3.5 times earnings) nothing will really change.

    I wonder if anyone in the banks actually understand all the Basel rules or understand the risks associated with each of the individual calculated figures. I'm sure individuals in the bank understand their department risks, but will gloss over these on the assumption that other areas in their bank are running lower risks and covering them.

    One of the other problems is the way bank profit figures are reported. Take HSBC reported today:

    http://www.bbc.co.uk/news/business-10834902

    It is almost impossible to make sense of these numbers to identify how the retail bank in the High Street is actually performing. But those are the numbers that "the man on the street" would really like to know, as that is where they are depositing their money . The UK profit in these figures is USD 2.1Bn (GBP 1.3Bn) for 6 months but what is that figure made up of, and what risks/exposures are inherit in supporting it?

    The profits, I believe, are all being generated by very high margin fees bearing no relation to the cost or risk of the transactions being performed. They get away with this because no-one is effectively regulating their activities and, as they are so large, they are not competing among themselves.

  • Comment number 32.

    We need reform of our money system.
    http://www.bankofenglandact.co.uk/

  • Comment number 33.

    My comment instigated by poster 11:

    As I see it now, most ordinary working citizens are either oblivious, or have buried their heads in the sand. With the masses generally being interested in Bookface, choosing their next flat screen TV's, chopping and changing cars with the weather and excessive food consumption; what is the likelihood of them realising they have become slaves to banking system; or even, what will it take to wake them up?

    In respect of Robert's point 1 above, (mortgage LTV's 65%) to me that is clear indication that property values will stagnate for years until earnings have caught back up again.

  • Comment number 34.

    This report is the "smoking gun", unfortunately the "meedja" and the various lobbyist ,thinktank groups will be making sure that this does not become understood by the population or else there would be riots, (no doubt there will be some great plan to combat the rise of the unruly peasants) in place already just in case the penny drops.
    Lets face it the banks run everything, our esteemed ex PM works for one now and none of them will care what happens as they are syphoning off all the goodies for themselves and dumping the debt onto the taxpayer.

    I say we get the money used to prop up the banks back, and then tell the bond holders and creditors to go whistle, same with the government bonds, show me where I asked successive governments to place me in perpetual debt and serfdom for me , my kids their kids and their kids kids.

    On radio 5 last week the BBC ran a programme (free labour party broadcast) and called it the leaders debate ie the Millibands, Ed Balls, Andy Wotsis name and here that talks really slowly that used to be on the telly with Andrew Neil.

    At one point a young person asked the question "why should I pay for all your mistakes before I have even had a chance at life"

    needless to say they went to another question, but you could hear the collective chins of the panel hit the floor.

    The Election promised us great change, respect, open transparent government.

    All we can see is the wrapper coming off the Neo Cons in the UK , Labour scrabbling trying to make the right noises, yet they both would result in the same thing.

    Given that we are supposed to live in a developed nation, what progress has been made over the last one hundred years.

    The answer is the people still dont have any power to affect change so why is this ? have we all been drugged with Big Burgers and mind control tv ?

    The choice seems to be get on the gravy train or pay for the mess like most.

  • Comment number 35.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 36.

    If the banking crisis was mainly due to the irresponsible lending by the banks to the property sector then the solution should also lie in that part of the economy. The manufacturing and other parts of the economy always had to balance their assets and the market value, if they do not match then the company will suffer with the share prices going up or down. The bank share prices and their assets are not linked and hence the mismatch of values.
    The scheme could be based on the fact that the house prices fluctuate – so the equation between borrowed money and the asset value should remain equal.
    If the house price falls then the price should be reduced on the bank balance sheet and should reflect in lowering of the mortgage payment – the trade off to the house owner and the bank comes, when he is selling the property – if the price has gone up, % of the profit is then shared by the bank, depending on the % of the loan remaining. This will stop the speculative buying and will also help restore the imbalance in the repayments and the values of the properties.
    For the home owners with less than 5 years repayments it can be made optional and for the new borrowers it should be mandatory. The same can be applied to the commercial sector as this will stop the excessive values put on the properties in the first place. Commercial places should be viable for commerce and not for speculation.

  • Comment number 37.


    I agree with previous posters, a very good article.

    The Basel Committee solution is complex, but the problem isn’t a complex one at all.

    The plain truth is that they created too much money as debt, where the debtors promise to pay was no good; and these promises to pay have been passed to us, the great unwitting, for satisfaction.

    The residue of the credit boom is unemployment, enormous debt, destitution for the minority, and unaffordable houses for the majority.

    I’d have the creation of money as debt under state control if I got my way, which I won’t of course, but still, hope springs eternal on Monday morning.

  • Comment number 38.

    Banking reform will not come from Basel but from Beijing. Be careful what you wish for:

    http://cantankerous.co.uk/?p=452

  • Comment number 39.

    Robert, take a look at Solvency II. It is Basel II for insurers and coming to an economy near you in 2012.

    Why wreck one industry when you can wreck two?

  • Comment number 40.

    Robert,

    Excellent article.

    If society's big conundrum is implementing egalitarianism (chastisement of banks and bankers) over heterodoxy (spend, spend now, I will borrow money to spend), then does this not require a considerably greater level of leadership and political will from the new government?

    Or put another way: if we want to control banks and bankers in terms of egalitarian principles, then why has the opportunity not been taken?

    Or perhaps it has? More dogma on self preservation, egalitarianism for lefties, etc, etc?

    Every cloud may yet have a silver lining. The argument for maximum wage is become stronger!

    PS what influence has Rothschild et al with Basel?

    --

  • Comment number 41.

    Robert-

    Could you please explain why "Off Balance Sheet" items are countenanced by Basle III? Aren't accounts meant to provide a fair and accurate picture of a business; isn't OBS a way of masking the true picture?

  • Comment number 42.

    Robert you are so right. I spent time in banking and in risk management - in one of the 'good' banks that took no govt support. We operated exactly as you say - principles related - and usually no more than 10 - equal to the number of fingers on a banker's hands and to the 10 commandments - simple and effective. Breaches of these were forbidden. Anybody approaching boundaries here knew to ask and not to cross.

    I have also done work with Basel II - horrid detail and constantly tripping over things - way too complex for even executive directors, who, of course, arrived on the scene too late in its implementation to stop their individual projects getting out of hand and costly.

    Take the example of rating models - how many do you think a corporate bank needs? 3, 5, 10? Try 100 in one instance - each customised to give the answers people wanted. ridiculous and a complete failure of governance thru use of complexity to confuse!

  • Comment number 43.

    Thank you again Robert, I believe that you are the only honest writer on fiscal and banking matters. We are surely still trapped in that Catch 22 situation where no one can honestly say how serious the problem is in case the publication of the truth triggers a catastrophic loss of confidence in the banking sector so we must continue with the Emperors New Clothes approach to banking. At the bottom of all these problems is the deliberately, covert and immoral system which all governments seem to support. Too many powerful people seem to exist on the concept of 'money clipping' as an industry rather than providing a service.

  • Comment number 44.

    Thanks Robert, this really does have to go mainstream.

    It totally highlights who runs this show, and its certainly not our political representatives.Its no wonder they crave us to have a cashless society, there would then be no danger to them at all...they could just make up all the numbers on there balance sheets.

    While we allow our major political parties to parachute in our voting choices we will never see a statement to say "all banks will receive no further tax payer help " they are incestuously linked and are destined to stay so.

    The people at the bottom are destined to stay at the bottom, whilst providing the champagne life style for a select few,as long as people are prepared to use these failed institutions there will be no change.

    Meet the new boss, same as the old boss......We did get fooled again.

  • Comment number 45.

    Each country has created individual exposures which a universal remedy or principle would expose, in turn burrowing into cross dependancies of economies and countries. Once one fails.....

    Airplanes/aeroplanes work like banks on the same basic principles money in money out and force out fly up, but while they all virtually come from the same big two, each country and each bank has its own way. Would Boeing agree to using Airbus tech?

    Once one country or bank has a choice of a cure that is worse than the cause be sure they will settle for tissues and misery.

  • Comment number 46.

    @ 26. At 10:46am on 02 Aug 2010, rbs_temp wrote:

    > excellent, well-written and highly informative...

    Sycophantic?

    > the mindlessly aggressive (and wildly uninformed) banker-bashing

    and a banker? Look, once bankers acquiesce to the requirements of the public, we would welcome them. Until, sit in the back and keep quiet.

  • Comment number 47.

    37. At 11:15am on 02 Aug 2010, Dempster wrote:

    > I agree with previous posters, a very good article.

    Yes, but let's avoid being too gushing in our praise. There are plenty of bankers who don't know the difference between Basel, Switzerland, and Basil Brush!

    The point is that we need simple rules that even bankers can grasp, e.g. screw up and you'll wind up poor.

  • Comment number 48.

    What a total waste of time. A committee of mice hunted by a prowling cat.

    More storms yet to come.

  • Comment number 49.

    What a nightmare. Keep up the good work Robert.

    We need accountability based on outcomes. Crash the bank - go to prison.

    Then we need to limit the profitability of banking so that it supports the real economy.

    And we cannot allow individuals to control so much capital that they can manipulate the markets.

  • Comment number 50.

    "...wouldn't it be far better to have some very simple easy-to-understand principles, that capture the spirit of the kind of risks that our society believes are appropriate for any institution that has been given the privilege of taking deposits."

    Here's an easy to understand principle that captures the spirit:
    Capitalism seeks to maximise profit at all costs, whether they be social or environmental; profit before people & the planet.

  • Comment number 51.

    The banks can't tolerate proper regulation because they're bust. Western nations are bust, indebted, home markets dominated by imports, beset by layer after layer of law and regulation whose purpose was to entrench the position of an interested party, printing - I repeat- printing money to prop up the illusion of solvency.

    Un-reported and un-punished mass mortgage fraud by millions of citizens run by and for the benefit of bank staff bonuses is still running UK govt policy. Note since the collapse in banks started in 2007, nearly every home purchase is still self-cert mortgage funded. Crooks don't give up a nice little earner, they have to be stopped.

    Empires don't reform or gently decline. They lose coherence and fall apart.
    Fecundity falls, the rule of law is abandoned, population declines.

  • Comment number 52.

    @ 37. At 11:15am on 02 Aug 2010, Dempster wrote:


    > I’d have the creation of money as debt under state control if I got my
    > way, which I won’t of course, but still, hope springs eternal on Monday
    > morning.

    The taxpayer picks up the tab when it goes wrong, so it's already under "state control".

    It's just that we didn't know until the bankers left the bill and sneaked out through the toilets!

  • Comment number 53.

    I was under impression that we are doomed because politicians cannot agree on banking, too many parties at the discussion table.

    Now it clearly appears that actually all banking is controlled from a single point!

    Good parallel with the airline industry. Remember the volcanic ash episode. The politicians took initiative and grounded all planes until they came up with a good, safe plan. Why can't they do the same with Basel? All profits taken off their hands until they come up with a good plan.

    PS. Something not enough in the media attention: during the second World War Basel committee continued unabated - German bankers were discussing no problem with English and American.

  • Comment number 54.

    @ 148. At 3:27pm on 01 Aug 2010, rbs_temp wrote:

    > 'bankers' are going to give a toss

    Yes, they are. Hit THE WIMPS where it hurts 'em most - in the pocket!


  • Comment number 55.

    This needs to be primetime - the article has a crucial momentum - keep going - it is important to all of us.

  • Comment number 56.

    "What happened in 2008, the collapse and rescue of the worldwide banking system"

    Has it been rescued? - don't be fooled by the banking profits that will be announced this week. The King does not have any new clothes, it's just that we're being informed he has by people claiming to know better than we do - however it doesn't make it any more true than it was before.
    Whilst the Government pours cement into the roof, the bricks of the foundations (SME's) are still coming out - now you don't need to be an engineer to work out what's happening next.

    "It is therefore odd that the future of banking is being decided as it has been done for more than 35 years, behind closed doors in the quaint Swiss town of Basel by a committee of unelected central bankers and regulators."

    Odd? - come on Robert, never heard of the NWO? - Banking deals have always been done in secret - what were you thinking man? - Journalists have access to everything? What about the restrictions on journalists placed around the Gulf spill? - your ideal world of 'free and independent journalism' is a myth.

    http://www.npr.org/templates/story/story.php?storyId=128419985

    Why do you think they write up the Wikileaks leak as 'putting lives in danger' - when clearly the endangerment to life is the soldiers uneccessarily being there in the first place? Here's what Fox news's expert thinks we should do with people who reveal the truth.

    http://www.youtube.com/watch?v=1waHdBrmrJk

    It's your job to make them explain why these things are done behind closed doors. You know as well as I do that if there was nothing to be concerned about the banking system would only be too happy to discuss this in public - in a PR attempt to show transaprency - if nothing else.

    "Some would argue that all this national horse-trading is also leading to a very worrying retreat from plans to put much greater emphasis when measuring the strength of banks on the old-fashioned definition of capital"

    Really? - gosh what a surprise, I'll fall off my chair shall I? - clearly Robert doesn't read the posts of his own blog because it's been said for a very long time on here that the regulations would be watered down With the combined self interest of the banks, their lobbying power, their control, mixed with the self interest of politicans who have their elections to worry about and simply want this mess to 'go away' - are you surprised that the interests of the majority are trampled underfoot?

    There's no point you being here anymore Robert - I glean more useful information from your bloggers than I do from your pieces - you are behind the times, stuck in a media bubble or something, watching what you say cautiously and trying not to say what you really think - because the BBC, like every other media station fears the banks lawyers

    "However there's a bigger point. Which is that we've probably lost the moment when it was possible to simplify banking regulation and sanitize the banking system."

    Lost the moment? - Seriously? - you didn't see the correlation between the Governments inaction versus the 'healing of time' - streuth Robert what's wrong with you today, they play this trick all the time!
    Iam Tomlinson
    Potters bar Inquest
    Bloody Sunday
    Blair Peach
    Iraq war inquiry

    You have to take ages to act in order to allow the criminals to escape, or concoct a watertight story. Is this the same Robert Peston writing this? - or have you been replaced by an imposter?

    If you dare act surprise when the 'second coming' of the credit crunch appears on the horizon - I shall be very cross. 80% of your readers know this is coming and yet you're acting as if things are generally 'normal'.

    On another note I see the RBS share price has exceeded it's break even point for the Government stake today - so when do we get our money back? When will the Government start selling the shares at a profit? - so the Capitalists can crow about their predictions of a gain (before I disect the lies for all to see)

    Maybe that would be a more useful story (the fraud about how we're supposed to achieve a profit from this excercise) than this piece about watered down regulations - something which everyone knew was going to happen months ago!

    Your posts are now sounding like a beautiful orchestra playing wonderful music across the tannoy - of the Titanic! Well written, but essentially useless to those who can already see the lifeboats filling up with the rich whilst being told to 'stay in your seats'

  • Comment number 57.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 58.

    If the bankers excesses are not curbed...then things like this can start to happen...

    A timely recounting of the Weimar disaster that aided Hitler's rise to power
    http://www.telegraph.co.uk/comment/columnists/charlesmoore/7921664/A-timely-recounting-of-the-Weimar-disaster-that-aided-Hitlers-rise-to-power.html

  • Comment number 59.

    #53 "Good parallel with the airline industry. Remember the volcanic ash episode. The politicians took initiative and grounded all planes until they came up with a good, safe plan."

    The politicians' panic is what grounded the planes. It was only the airlines that took the initiative and flew through the no-fly zone that showed the ban could be lifted. So perhaps it is the same.....





  • Comment number 60.

    #46. Jacques Cartier wrote:

    "Sycophantic... and a banker? Look, once bankers acquiesce to the requirements of the public, we would welcome them. Until, sit in the back and keep quiet."

    No, Jacques, I am not a banker (although I sometimes wish I were, particularly during bonus season). My opinions simply happen to differ to yours - and you might come across as less opinionated if you were to accept that others hold different views and to let them express those views, rather than insisting that they 'sit in the back and keep quiet'.

  • Comment number 61.

    Robert, an entertaining, informative and educational read. Thanks.

    Perhaps not as "unbiased" as some of the bloggers here would imagine.

    I particularly liked the phrasing of this bit.

    "So the clever clogs executives who run banks will be able to carry on as they have been doing for the past 30 years of globalised financial capitalism, which is to see the Basel strictures as the rules of a game to be exploited for vast profit."
    =================================
    Now, about those principles...do you have any ideas?

    1. I like the general consensus that I keep hearing that the creation of money through FRB should be constrained by the government/lender of last resort.
    2. I like the simplicity of valuing loans on their historical income, not on their "risk value". (After all, my risk as a borrower is based on my historical income, so why shouldn't the risk to the bank of new business be valued in the same way?.)

    Any other ideas?

  • Comment number 62.

    I wonder why some people act surprised!

    HELLOOOO, did you expect anything different?
    In Bulgaria they say, the wolf changes his fur, but never his temper!

    Sorry, I know how it is - people indebted by mortgages NEVER protest or revolt. Carry on with your jobs, make sure you don't lose them as otherwise everyone will laugh at you!

  • Comment number 63.

    6. At 09:38am on 02 Aug 2010, Jacques Cartier wrote:

    Before the usual bunch of banker sycophants turn up to soft soap us, let's make one thing clear - bankers are far too stupid to understand much of this stuff too. So it is useless."

    Turn off the broken record player. Do you really think the average banker is stupid compared to, say, your educational background?


  • Comment number 64.

    I now don't think it will be long before the riots start, the banks are forcibly taken over and their boards thrown out on the street.

    OK I'm exagerating but I really don't understand what it is the politicians are scared of. We need these banks but we need them to be an integrated part of our economy working with industry and govt to rebalance the economy, provide more private sector jobs. If the management are not prepared to do that then we must replace them with people that will.

    There can't be any delays now. Give them an ultimatum. Prove they will cooperate or face the consequences.

  • Comment number 65.

    And so here we are again, principles vs prescription, in the oldest regulatory debate in town.
    Dubious analogies aside, it's difficult to argue with the basic thrust of Peston's argument: the Basel rules are, and will no doubt always be, an imperfect compromise. They are clearly arcane and impenetrable in form, and - like all rules - they will always be unable to preclude every potential loophole or anticipate every future market/product development.
    At the same time, is it really possible to be so confident about the superiority of a principles-based regulatory approach?
    This is the methodology enshrined in the UK, with the FSA's eleven high level principles for financial firms. Even if you haven't made a technical breach of any of the (massively voluminous) underlying rules, the FSA can still discipline any firm that contravenes one of the principles.
    Did this help over the past few years? I can't say I noticed. Nor would I believe the average punter had a clue about what the FSA's principles actually stated.
    Penning a few overarching statements of intent and giving regulators the ability to punish firms for their breach could be helpful. But the real question has got to be enforcement, and all the political and economic consequences of trying to keep the bonus-junkies on the straight and narrow.

  • Comment number 66.

    The key elements of the latest gamblers permission slip seems to be the continued ability to exclude special investment vehicles from the bank's balance sheets this hiding both profits and losses. Essentially so long as banks are excluded from the common-sense definitions of ownership - i.e. management control then the frankly insane fiddles will continue.

    As I read the documents banks will continue to be able to produce financial statements and accounts that hide their true financial position. And what is more the valuation of the assets and liabilities does not appear to be 'enforced sale/purchase' at the data of the accounts (a very hand mark to market).

    What is needed is that banks have to produce accounts that do NOT view their businesses as 'going concerns' - but their assets and liabilities should be valued as 'fire sales' at the accounts date - nothing less will let investors truly understand the actual financial position of a bank.

    Having said that another set of books/accounts should show the view as a going concern too. The difference between the two sets shows how risky the bank is.

    But none of this is included in the latest proposals. The key seems to me that both sets of figures are produced with the directors and auditors required required to justify their view.

    Summary: we need the 'going concern' view and the 'going bust' view - both with proper asset/liability inclusion (see above). Pity this seems absent from the proposals.

  • Comment number 67.

    #57. writingsonthewall wrote:

    "Until then I would suggest you are discredited as a liar, for I cannot see how you could pay off any substantial mortgage with such a trade - unless of course you are extremely wealthy."

    I would think that anyone can see that a relatively modest investment in shares that then increase in value by a factor of 4 would be sufficient to repay a modest mortgage. And the risk was minimal, as it was always a pretty safe bet that RBS would not be permitted to go under.

    "This would not surprise me as only the wealthy can claim this is 'only a recession' (your words remember) and trivialise the greatest downturn in 100 years."

    In the context in which those words were written - which is that this is neither the end of capitalism nor even a significant change in the way in which most people live their lives - I stand by them. This is 'only' a recession. (And, for many people, particularly those with secure jobs and below-base-rate tracker mortgages, it's been a pretty good recession. Oh dear, have I just lit the blue touchpaper??

  • Comment number 68.

    A good summary Robert. By keeping it all complicated they keep it beyond regulation.

    As I commented on 30th July

    They've been working since June on getting round the regulations.
    Plenty of time.

    QED

  • Comment number 69.

    22. At 10:18am on 02 Aug 2010, benghis_khan wrote:
    The simplest piece of legislation we could produce to try and prevent a repeat of the banking crisis is to limit the function of banks that lend money at interest and provide bank accounts to individuals to those things only. How hard can it be to draw up a document that says exactly that?
    I'm quite happy for anyone who wants to gamble with derivatives or other exotic whatevers to do so; I would just prefer they didn't do it with money from the same "pot" that contains my savings account.
    Additionally, hopefully a "bank" that specialises in high risk investing but doesn't have it's hands on money owned by you and me can be allowed to fail, and we will not need to provide yet more of our own money in order to stabilise the economy.

    I would say this is a fair and workable solution.

  • Comment number 70.

    It is interesting how none of these exposures were noticed prior to the crash. Hind-sight policy always means that something bad has already happened. The idea should be to make sure things don't break, not go in afterwards and fix what is broken. The problem again is that this entire scheme relies on the honesty of the bankers and those who provide oversight....there is not indication that any of that has changed. Lastly, the individual has again been left out. Nothing to address the massive loss of retirement accounts and investments that were diminished by the gambling of the bankers and fiancial serivces and to address any responsbility on the part of those in collusion to repay any of it. This is the one determent that might prevent future scheming within the financial services industry. No accountability to those who actually put their money in the system and expect some good faith effort that it will be protected.

  • Comment number 71.

    @ 63. At 1:14pm on 02 Aug 2010, SmilingEdBalls wrote:

    > Do you really think the average banker is stupid compared to, say,
    > your educational background?

    In three words - very much so. I was only an "average" rocket engineer.

    BTW: Do you really think the average banker can do long multiplication, or would he
    run out of fingers?

    Look, chum, it's time for serious, capable people to look after things for a bit, and no squawking please. Bankers had the chance to show how "clever" they were, and the boneheads ruined us.

  • Comment number 72.

    @60. At 1:02pm on 02 Aug 2010, rbs_temp wrote:

    >> @ 46. Jacques Cartier wrote:
    >> "Sycophantic... and a banker?

    > No, Jacques, I am not a banker

    Just sycophantic then, eh?

  • Comment number 73.

    67. At 1:24pm on 02 Aug 2010, rbs_temp wrote:

    "I would think that anyone can see that a relatively modest investment in shares that then increase in value by a factor of 4 would be sufficient to repay a modest mortgage. And the risk was minimal, as it was always a pretty safe bet that RBS would not be permitted to go under."

    ....so a modest mortgage of £150,000 would require an investment of around £60,000 to make a NET profit to clear the mortgage.
    You may think it's common to have £60k lying around for a 'punt' (because there was no guarantee that shareholders wouldn't end up losing out - like Northern Rocks shareholders did) - but the majority would see this as unlikely for them. The 'factor of 4' is misleqading again because of course you're talking about gross profit. Once taxes and transaction costs are removed the picture is very different (as I went to pains to explain when you first raised this claim)

    "In the context in which those words were written - which is that this is neither the end of capitalism nor even a significant change in the way in which most people live their lives - I stand by them."

    Oh really? - well this really shows how you 'view the world' - directly from your own eyes.
    There are very few groups who have not had their lives significantly changed by this recesssion.

    1) 2.5 Million are unemployed (although admittedly some were previously)
    2) Anyone who is a net saver will have seen their income dramatically reduced
    3) The majority of SME's are either facing extortion of payments in their overdraft charges or facing a forced wind-down of their operations.
    4) Most high streets now have big holes in them where Woolworths used to be, or maybe some of the fashion shops now gone - and no replacements have arrived.
    5) Nearly 450,000 people made insolvent since the start of the credit crunch
    http://www.guardian.co.uk/news/datablog/2009/nov/06/bankruptcy-iva-insolvency-debt-data
    6) 8 million are now economically inactive
    http://www.telegraph.co.uk/news/newstopics/politics/7257667/Eight-million-people-economically-inactive.html
    7) Millions affected by pay cuts or freezes
    http://www.telegraph.co.uk/finance/7888729/Millions-face-four-year-fall-in-standard-of-living.html

    ...and I haven't even mentioned the numerous people who will be affected by cuts and strikes.
    One or two of these you certainly could write up as 'part of a 'normal' recession' - except they're all here simultaneously.
    ...or don't you believe the Government when they say "The harshest cuts of a generation" - is that what we got in the last 'just a recession'? I don't remember Major saying anything like that (but please show me the quote if I'm wrong)

    "This is 'only' a recession. (And, for many people, particularly those with secure jobs and below-base-rate tracker mortgages, it's been a pretty good recession. Oh dear, have I just lit the blue touchpaper??"

    What you mean is you are on a tracker mortgage - well my friend, so am I - so why can I see this is not merely another recession and you can't - despite the fact that neither of us is feeling it?

    Your claims of money making are either fictional, or you are merely trying to mislead those here into thinking this is less of a trauma than it is.

    So the question is - did you 'punt' £60k or do you have a 'less than average mortgage'? - the public is dying to know "oh great trader". How were you so sure that RBS wouldn't be wholly nationalised that you were prepared to bet your mortgage on it?

  • Comment number 74.

    Basel II has been a long time in arriving. For the most part the USA has led the way in watering down the requirements.

    That said, there is probably no other industry that undergoes as much scrutiny as the banking sector. At the end of the day this all costs the consumer who bears the double whammy of having bailed out many banks as well through government intervention. One of the big failings is the lack of action against regulatory body management for being asleep on watch. The same is true of auditors - internal and external.

    So by all means continue the crusade against the banks - especially on lending and bonuses but we could also target the mass of businesses that feed off the same table.

  • Comment number 75.

    57.

    Moderators - what is offensive about this?
    Which house rules were broken?

    Rbs_temp made a claim and I am challenging that claim - are the BBC saying that statements can be made and must remain unchallenged?

    This is odd considering this is supposed to be a free country. Are we now saying that I can make up "any old lie" and that if someone challenges this you will remove it?

    Are you serious? - do you know what freedom of speech entails? What sort of pseudo fascist PR front are you?

    If you want to solve the problem, don't allow bankers (and oil workers) to come on here and mislead the people with inaccurate accounts and down right lies.

    Yes - if the BBC were more 'clued up' they would realise how their blogs have been manipulated to contort the truth by corporations and their PR departments.

    It's truly becoming pathetic - no wonder the rebels always go for the national news broadcaster first in a revolution - you're simply assisting the liars in keeping the lie going for a little bit longer.

    Shame on you BBC - just because you want to get away from the fact that your useless executives have been overpaying themselves whilst providing poor and unbalanced news coverage during this Economic crisis. When the people realise what is actually happening - they're coming for you first.

  • Comment number 76.

    71. At 1:45pm on 02 Aug 2010, Jacques Cartier wrote:
    @ 63. At 1:14pm on 02 Aug 2010, SmilingEdBalls wrote:

    > Do you really think the average banker is stupid compared to, say,
    > your educational background?

    In three words - very much so. I was only an "average" rocket engineer."

    A rocket engineer? Rockets for what (genuinely interested). If so are you retired, hence the continual rants on Peston's blogs?

  • Comment number 77.

    Brilliant article. Why won't the politicians listen??? Time for all of us to go to www.writetothem.com and ask our MP's what they intend to do about this.

  • Comment number 78.

    @1. At 1:45pm on 02 Aug 2010, Jacques Cartier wrote:


    > Do you really think the average banker is stupid compared to, say,
    > your educational background?

    In three words - very much so. I was only an "average" rocket engineer.

    BTW: Do you really think the average banker can do long multiplication, or would he
    run out of fingers?

    Look, chum, it's time for serious, capable people to look after things for a bit, and no squawking please. Bankers had the chance to show how "clever" they were, and the boneheads ruined us.


    ------------------------------------------------------------------------------------


    Get a grip of yourself "chum". For the sake of relevant and meaningful discussion please get yourself a dictionary and look up the word "objectivity'. The extent of your hatred and resentment of the banks and their employees is ridiculous.


    How do you suppose these "serious, capable people" with no experience or knowledge of the banking industry are meant to improve things?

    BTW, Jacques, before you question my intelligence (as seems to be a not very endearing habit of yours) my background is in both aeronautical & propulsion engineering, and investment finance.


  • Comment number 79.

    63. At 1:14pm on 02 Aug 2010, SmilingEdBalls wrote:

    Do you really think the average banker is stupid compared to, say, your educational background?
    =======================================================================

    It amazes me that anyone still thinks that these people, who have brought down the west's economic model by their stupid, avaricious behaviour, are actually clever. Perhaps the type of person who measures people by how many yachts they own, how big their 4x4 is, how much their house cost, what they wear, etc, etc.

    Well obviously I can't speak for JC, but personally, I have a first in physics, a PhD, and worked as research scientist in the aerospace industry. Do I consider myself cleverer than a bunch of clowns whose only task was to make a fortune pushing paper around within the city on one waay bets, and in the end couldn't do that properly? Well, yes.

    Perhaps some detail from you on what makes these jokers cleverer than me would assist the audience. Oh, they "earned" more money than me? Yes, but every taxpayer in the western world is paying the bill- how clever is that? But then maybe that defines clever in your warped little world. Screw up completely, take no blame or responsibility, and pass the tab to everyone else. Lovely.

  • Comment number 80.

    Thanks for the excellent - and worrying - post.

    I agree with previous posters that this deserves to reach a wider audience.

    Your proposal for a set of principles which could be widely understood seems essential, and one which would help the general public engage in an issue of critical importance.

    The logical next step would be to put some flesh on the bones. Would you be willing to propose what these principles might be?

    It would be useful to have something more concrete with which to lobby my MP.







  • Comment number 81.

    @ 76. At 2:12pm on 02 Aug 2010, SmilingEdBalls wrote:

    > A rocket engineer? Rockets for what (genuinely interested).

    Technically, the work related to orbit determination, prediction and manoeuvre planning for geostationary and low earth orbit satellites including IRS1A, IRS1B, ROSAT, DFS1, DFS2, DFS3, TVSAT 1 (dud) and 2, and RADARSAT1.

    > rants on Peston's blogs?

    Those people ranting appear to be schizophrenic, ego-centric, paranoiac, prima-donnas in the banking sector. They are a nuisance. My comments are about those stupid cretins in The City who wrecked the world's economy.

  • Comment number 82.

    BRING BACK 57!

  • Comment number 83.

    78. At 2:26pm on 02 Aug 2010, nowwerefarming wrote:

    "How do you suppose these "serious, capable people" with no experience or knowledge of the banking industry are meant to improve things? "

    Well how about by not already benefitting from the system industry they are trying to 'improve' and therefore actually having a desire to fix it properly?

    You see for all the impressive background and I suspect excellent knowledge and intelligence - it's the simple common sense problems which trip you up every time.

    It's the same reason that Doctors disciplining doctors is ineffective (GMC) - or policemen disciplining policemen, or teachers disciplining teachers - or best of all, politicians disciplining politicians (remember the expenses and how that worked out?) all bound by the very system they are supposed to be restoring public faith in.

    So Jacques is right - why would you ask the very people who got you into the mess in the first place (and benefitted from it) how to get out?

    Intelligence 0 - Common sense 1

    Anyone who truly understands banking, finance and Capitalism will know that it's doomed one way or another. Those who still think it can be fixed should read their history books as the claim that it can be fixed has been attempted for the last 100 years - with zero success I might add.

  • Comment number 84.

    81. At 2:33pm on 02 Aug 2010, Jacques Cartier wrote:
    "Technically, the work related to orbit determination, prediction and manoeuvre planning for geostationary and low earth orbit satellites including IRS1A, IRS1B, ROSAT, DFS1, DFS2, DFS3, TVSAT 1 (dud) and 2, and RADARSAT1."


    Rocket science. . . It's not exactly brain surgery though is it.
    Sorry. Couldn't help it.

    All getting a bit mitchel and webb in here.

    http://www.youtube.com/watch?v=iGCMtk695Cg

  • Comment number 85.

    Thanks Robert. Great report.

    Surely now it is up to National Governments to ensure that their own banks leave the casino or at least ensure that retail and business banking deposits are not exposed to excessive risk taking.

    Will the politicians act or will they hide behind this gutless retreat?

  • Comment number 86.


    I would agree with the majority of comments on there that this is a excellent, well-written and highly informative article, Robert. But I would caveat that with the following statement "for the masses that have only a limited knowledge as to why this mess occurred" For that reason alone, this really does need to hit the main news headlines today and not just be relegated to the BBC new site business pages.

    Packetrat and wotw I actually agree with you today.. God i must have drunk too much over the weekend to be saying i generally agree with WOTW today..

    Jacques Cartier "broken record" come on surely you can add something more constructive than the usual "Bankers are responsible for every ill in the world"

    WOTW & rbs_temp I do enjoy your usual ping pong back and forth fights over rbs_temp's mortgage. Although I am at loath to put my toe or two pence into that enjoyable fight. I haven't actually seen rbs_temp state how much his mortgage is, so I think the £150K your stating WOTW is a bit presumptive. But even so if this £150K mortgage was taken out say 15 years ago then amount owed would be reduced and more than possible to be cleared by a punt on banking shares.

    WOTH your statement about the risk of RBS being wholly nationalised, yes it was a risk, but to suggest it was likely ignores the political aspect of wholly nationalising such a major bank, and that therefore reduced the risk, this alone made the idea of taking a punt of RBS shares more of a measured risk. A labour government trying to still promote itself as "New Labour" knowing it had to fight an election soon, the idea of wholly nationalising major banks was too big of a pill to swallow knowing it would open them up to criticism that they had returned to the old labour ways of wanting nationalise everything. Rightly or wrongly it still meant it was less likely that RBS or any other major would be taken wholly into state control.

    Getting back to Robert's article, I think everyone with any common sense knew and saw that any new proposals from Basel was not going to be the answer and more importantly will never be the answer due to individual national interests and the fact Banks wont want to limit there revenue options. Basel always has had too many holes poked in it. I for one wont hold my breath waiting for a version that doesn't have holes all over it.

    The point is can we even wait in the hope that there might be a version that isn't so full of holes? Well sure if your ready for another crunch, I am not sure WOTW's views of doom and gloom are quite right, I am yet to be convinced it will be any worse than what we have just gone through/going through, but it could equally be as bad. What is so wrong with unilateral action in this country, yes the majors are international, but they have to abide by UK banking regulations if they want to trade here, do we really see Barclays, HSBC, Santander pulling out of the UK market because of tougher regulation? I doubt it.



  • Comment number 87.

    WOTW/Jacques

    Have the likes of 'rbs_temp' and 'SmilingEdBalls' been fielded by those working for the banks with the long term intention/strategy/agenda of biasing/trashing these public service BBC blogs for their paymasters own ends? Remember, the banks have large lobbying funds with which to protect their interests with.

    Avoid the one-to-one tittle-tattle posts...stay on subject, stay focussed.

  • Comment number 88.

    84. At 3:10pm on 02 Aug 2010, warwick
    81. At 2:33pm on 02 Aug 2010, Jacques Cartier

    I am in fact a 'Rocket Surgeon' - now beat that dumbo's!

    Still fascinated by those in banking who believe their own hype. The most methematical people work in Performance and Risk - not in spivving or gambling on the front desk.
    That's why the front office always cries when their performance is analysed - strangely the expert mathematicians in performance don't always agree with the self-styled 'masters of the universe' who are unable to consider attribution or any form of opportunity cost - oh, as well as getting the purchase price COMPLETELY WRONG! (you can tell what I'm fixing today can't you!)

    I could tell you some stories about the front office - but unfortunately 'clauses in my contract' prevent me from doing so. Rest assured however, just as with all the industries, the 'face' is often useless to the business, it's the "working parts" which are vital and often neglected. I mean you can find thousands of jobs for performance and risk analysts - try finding one for 'front office gambler' - you won't find many (if any). This is for 3 reasons
    1) They're the most popular position (all play and no work)
    2) It's a closed shop (you won't find the position of 'fund manager' being advertised in your local rag)
    3) People are dissatisfied with the back office roles which are often not (relatively) well paid and are looked down upon by the arrogance of the FO staff - and consequently people are leaving in droves.

    I mean we're on our 4th Head of risk and our 3rd Head of performance in the last 4 years - they're not leaving because they can't do the job - they're leaving because they're not providing the 'right' answers

    You see the industry is in denial - it doesn't want to hear 'caution there's a tornado coming' - they just want to hear 'the good times are back boys'.

    ...now where do we think that will lead?

  • Comment number 89.

    There are, by any standards an awful lot of people out there who are struggling to keep up with interest payments on mortgages, loans, credit cards and the like.

    Imagine if they understood how money is created and their debt with it.

    Imagine if they went on a payment strike.........a general debt strike.

    I think they’d need more the Basel Committee to sort that one out.

  • Comment number 90.

    Fake profits + failed banks = greed + stupidity.
    Get over it, people. Rehabilitate yourselves.

  • Comment number 91.

    @ 78. At 2:26pm on 02 Aug 2010, nowwerefarming wrote:

    > resentment of the banks and their employees is ridiculous.

    Pipe up when you've paid us back. Until then, quit squawking.

    > How do you suppose these "serious, capable people" ... are
    > meant to improve things?

    The cleaners could do a better job of it than "bankers" have. Or did you forget that they flushed all the money down the toilet on bum deals and idiotic gambles? Are bankers are also prone to forgetfulness?

    > before you question my intelligence (as seems to be a not very endearing
    > habit of yours) my background is in both aeronautical & propulsion
    > engineering, and investment finance.

    If you truly have any experience as an aeronautical & propulsion engineer (which is not clear from the wording of your reply) then you'd be the first to agree that "however complex the engineering of a plane may be ... the effort to mend and reform air transport would be conducted in full public gaze, using ideas and phrases understandable to all".

    So, speaking as an aeronautical & propulsion engineer, should those boneheads in Basel conduct themselves in this secretive, sly manner, after coming within an inch of ruining the world's money system? Please try to answer in the clear manner befitting an engineer, not as a “banker”.

  • Comment number 92.

    Excellent article Rob.

    The basic point of regulation and regulators is to act as repositories of human learning and experience; and through that create an infrastructure that is robust and protects all our interests in the long term. The trouble is, since the 1980s, the banking sector have paid lip service to regulations and pressurised goverments into deregulating as much as possible. The repeal of Glass Steagal in the US in 1999 is a classic example ... almost a lifetime after it was brought in (after lessons learned from the crash of 1929), most people had forgotten why it was there. It was supposedly getting in the way of banks making money, so it was repealed. Many attribute the start of the current crisis to its removal. If the Basel III is to avert a repeat of the last crisis, it needs to address:
    1. Why banks can be permitted to have 'off balance sheet liabilies'. I see the 'OBS' term is still there in Basel III. If they are liabilities, then they have to be on someone's balance sheet!
    2. What is a 'safe' ratio of debt to income, and debt to assets.
    3. Why the financial auditors never saw any of this coming. Lehmans and Northern Rock were allegedly healthy organisations before they went bust. The document does make some references to IASB and GAAP; but as yet, I've not seen anything substantially new.
    4. Why the ratings agencies never saw any of this coming.
    5. The role of national governments and central banks during times of crisis.
    6. The role of the general public in the creation of an asset price bubble.
    As far as I can see the document barely touches on any of these points. In general, all they've done is move a few assets from one bucket to another; and increase a few percentages here and there. Mere tinkering with a machine that has failed catastrophically. Sure, it's tricky, and any changes thay make have to be done while the engine is still running; and without creating another recession (which could happen if they get the liquidity ratios wrong)
    ... BUT surely what we need is a clear statement of who controls what sort of risk; and what assets are put aside to cover them. Banks should be able to withstand the failure of an individual/single organisation. The banking sector as a whole should be able to withstand 'normal' recession events without the recourse to government funds. Governments are there as a last resort when the entire system fails, and noone knows the true value of anything.
    My (somewhat) harsh interpretation of Basel III is that the BIS are hoping that the events of 2008 are so rare that they are unlikely to be repeated, so they don't see it as in their remit to legislate against them. The trouble is, if they don't, who will? It needs to be done at an international, cross government level; otherwise, human nature being what it is, we may well be revisiting the events of 2008 sooner than we think.

  • Comment number 93.

    Two additional points are worth adding to your essay:
    * There ought to be a maximum proportion of companies' or householders' investments that can be funded by lending banks and a minimum to be funded at the risk of owners/shareholders. So it's good practice to require owners of SMEs to put some of their own capital or property 'at risk' too. That provides an incentive to take greater care. And,
    * Loans provided within steadily growing economies usually carry a lower overall risk than when growth is sluggish or even likely to go into decline. By plunging our country into uncertainty, the new coalition is actually making loan conditions harder. Because banks have to assume dicey conditions ahead and calibrate risks accordingly.
    For both reasons, banks should price-in greater risks in lending to SMEs right now.
    Which implies that coalition complaints about banks offering much less attractive borrowing terms is an inevitable consequence of so-called 're-balancing' by drastic cuts to public projects. If 're-balancing' was done at a slower pace, banks' risk assessments would become more accommodating to SMEs.

  • Comment number 94.

    36. At 11:11am on 02 Aug 2010, shree korde wrote:
    If the banking crisis was mainly due to the irresponsible lending by the banks to the property sector then the solution should also lie in that part of the economy. The manufacturing and other parts of the economy always had to balance their assets and the market value, if they do not match then the company will suffer with the share prices going up or down. The bank share prices and their assets are not linked and hence the mismatch of values.

    ----------------

    You don't under the stock market do you ? It is very rare that a company's share price reflects its underlying assets, rather a discounted valuation of its perceived future income/value.

  • Comment number 95.

    84. At 3:10pm on 02 Aug 2010, warwick wrote:

    >> 81. At 2:33pm on 02 Aug 2010, Jacques Cartier wrote:
    >>"Technically, the work related to orbit determination

    > Rocket science. . . It's not exactly brain surgery though is it.
    > Sorry. Couldn't help it.

    Comparing banking to rocket science IS like comparing butchery to brain surgery. Let's me put it this way. When I designed a manoeuvre, the satellite orbit around the planet was delayed by (say) one second. I'd get complaints from the antennae staff, because of the inaccuracy - one second late after 50,000 kilometers!

    Bankers are mostly just crazy, greedy, clumsy buffoons (apart from nowwerefarming) but they can't admit it to themselves, can they? It's the end of an era.


  • Comment number 96.

    86. At 3:30pm on 02 Aug 2010, Secr3t wrote:

    > Jacques Cartier "broken record" come on surely you can add something more
    > constructive than the usual "Bankers are responsible for every ill in the world"

    Sad to say, they are too stupid to understand anything more than that, I'm afraid.

  • Comment number 97.

    But what even an idiot like me understands is that the whole problem was caused by Banks taking too much risk and as I understand it part of that was the irresponsible way that USA regulation pushed Freddie Mac and Fanny Mae into lending on over valued properties to people who had no prospect of paying.These loans were then converted into bonds which,in my poor understanding, had a fraudulently high value. It seems to me that this is the essence of what happened throughout the world financial industry, just the details in some cases were different. In my personal opinion this constituted an Industry that was institutionally crooked and hid that deception in obscure financial instruments. I don't think it was a mistake or incompetence.I believe it was a deliberate scam because they knew that they could always take the taxpayer for billions if it failed. I don't see anything to convince me that the Basel Committee has rooted out what I believe is the worldwide criminality of the finance industry. To use your analogy-it is as if the maintenance records of the aircraft are being filled in without the work being done. Thousands of lives were ruined beyond recovery, homes lost and businesses destroyed and we are still paying very heavily as we see in the swinging cuts to come in the UK. In my view this was a massive crime and nobody has been punished and now the Govt. is pushing banks to lend again to those who cannot pay and it is all about to happen again. How can we trust any Financial institution or any Govt. ever again?

  • Comment number 98.

    Robert's posting may be a breath of clarity that blows the cover of who we all really work for but the proof of the pudding will be in the eating. Who will break ranks first and insist on a banking system that is fit for purpose, serves society and is tranparent? For sure no international committee will do so if the so-called experts can only come up with something worse.

    Between the American hegemony of Moody, S&P and Fitch whose total misrating of sliced and diced mortages on overvalued land (among many other things) is the cause of the actual downfall for which the US taxpayer has picked up only a small part of the cost, to the gnomes of Basel whose unintelligible scribblings allow all this to happen, what hope have the rest of us?

    When RBS almost went over in 2008, we could not have nationalised it, unless this was done with no compensation, because their total liabilities stood at about £2Tn which was comparable to the total UK public and private debt at that time. Managing to get control of 75% or so of the bank was only possible because of the collapse in share price but we still couldn't have taken on the complete liability because the UK as a whole would have been downrated severely. Heads they win, tails they don't lose.

    Those few building societies that remain seem to me to be the only sustainable model. But unfortunately as greed showed when their market was 'liberalised', the prospect of profit today and the risk of a loss tomorrow - which may not occur of course - versus better security but less profit was too much.

    It is a brave government of any country/currency that puts the short term future at risk by changing the rules unilaterally because capital will fly out of the window. Again, heads they win, tails they don't lose. Take your choice.

    Do we have such a government? No chance - they are the same as the last lot and the lot before them (who 'liberated' everything in sight) and so on.

    But in fact this is exactly what must be done. At the moment, banks exact such punitive charges that it is not worth working. By comparison with such unelected stealing, government taxes are quite benign and accountable.

    For example, I struggle to understand why it is possible for there to be 14 different ways (according to Which?) that interest is charged on credit cards. This is a calculation I did as a 10 year old and there was only one answer then. My gas, electric or telephone bills are simple to check. How come under nu banking-maths there are 14 answers? Is this their idea of multiple choice?

    The sooner properly transparent controls and charges are put in place, the better. If this means that the city is no longer so important, well perhaps it may also mean that banks will have to lend at sensible interest rates, terms and conditions to small businesses so that real wealth can be created. With BoE rates at 0.5% (3 month Libor at 0.75%) and overdrafts even to good customers starting at 10% we see clearly where the real devils are. And who knows - a properly regulated and genuinely safe city may be much more of a prospect for investment than the present casino.

  • Comment number 99.

    91. At 3:52pm on 02 Aug 2010, Jacques Cartier wrote:
    @ 78. At 2:26pm on 02 Aug 2010, nowwerefarming wrote:

    > resentment of the banks and their employees is ridiculous.

    Pipe up when you've paid us back. Until then, quit squawking.



    Precise and to the point. Applause to you.


  • Comment number 100.

    87. At 3:38pm on 02 Aug 2010, DebtJuggler wrote:
    WOTW/Jacques

    Have the likes of 'rbs_temp' and 'SmilingEdBalls' been fielded by those working for the banks with the long term intention/strategy/agenda of biasing/trashing these public service BBC blogs for their paymasters own ends? Remember, the banks have large lobbying funds with which to protect their interests with.

    Avoid the one-to-one tittle-tattle posts...stay on subject, stay focussed."

    Hmmm - not sure the banks really care what you guys write on this little section of cyberspace guys. But keep banker bashing if if makes you feel better.


 

Page 1 of 3

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.