Basel III’s Bedeviling Complexity • The Abiding Perils of E-Mail

When it comes to international banking rules, the simpler the better

More than four years after a financial breakdown plunged the world economy into the worst slump since the Great Depression, efforts to build a stronger global system of bank regulation are barely inching forward. Regulators seem overwhelmed by the complexity of their own reforms. To make faster progress toward a safer system, governments must aim for greater simplicity.

The Federal Reserve and other regulators have said U.S. financial institutions won’t be held to a Jan. 1 deadline to boost their capital as required by the Basel III international banking standards. At the end of October, the chairman of the Financial Stability Board — the multinational panel overseeing the Basel III reforms — said he expected that only 6 of the 28 global banks identified by the board as “systemically important” would be covered by the new rules on the agreed start date.

As Andy Haldane of the Bank of England recently explained, the problem lies in legislating national rules that conform to the new Basel standards. That’s difficult because the standards are complicated. The Basel I agreement of 1988 was 30 pages long; Basel II in 2004 logged in at 347; Basel III is 616.

Basel III is a model of brevity compared with the Dodd-Frank law that codifies the broader U.S. regulatory response to the crisis. Haldane has estimated that the rulemaking could ultimately amount to 30,000 pages. Many of those pages are the result of banks’ own efforts to insert exceptions and caveats.

The financial crisis belies the idea that increasingly complex rules are the right way to control an increasingly complex system. Simple is best, especially when it comes to the core of the new standards: capital adequacy. A capital ratio, at its essence, should be the amount of money that a bank’s shareholders put at risk as a percentage of the bank’s assets. Basel III complicates the calculation by allowing banks to place a lower weight on supposedly safe assets and by adding other obligations, such as hybrid bonds, to the definition of capital.

Basel III does introduce a simple ratio of equity to assets, but sets the adequacy level at just 3 percent. In other words, a mere 3 percent decline in the value of a bank’s assets — far less severe than what happened in the recent crisis — would be enough to render it insolvent. Worse, the ratio is proposed merely as a supplementary monitoring tool, not the binding regulatory limit it should be.

Finance experts have advocated, and Bloomberg View supports, a simple equity-ratio requirement of as much as 20 percent of assets. Research by various economists, including Anat Admati of Stanford University and David Miles of the Bank of England, suggests such sharply higher capital requirements would produce a net benefit for the economy. To be sure, regulators will still have to take the nature of assets into account: If a bank specializes in high-risk real estate lending, for example, even 20 percent might be too little. A balance must be struck, but it’s increasingly clear that regulators have erred too far in the direction of complexity.

In the Petraeus affair, a reminder of how not to keep secrets

Perhaps the most vexing aspect of the fall of General David Petraeus is why, decades into the popular e-mail experience, a master of intelligence and spycraft thought his romantic e-mails could remain secret.

Let’s state for the record a fairly basic observation: E-mail leaves a virtually permanent, indelible record. You can empty your trash, you can bury your laptop, you can create fake accounts, but chances are there’s a server somewhere with a twin version of your correspondence. It’s waiting in the shadows to come back and haunt you like a ghost in the machine.

We remember not to drop the radio in the bathtub; we remember not to drink gasoline; most of the time we remember not to lick the pole on the chairlift. Yet we cannot remember that even the most deeply buried e-mail is probably findable.

It’s easy enough to hazard a few guesses as to the reason, of course. In the span of human invention, e-mail is a relatively new technology (compared with, say, the telephone). It’s also fast. Maybe it’s not as fast as Twitter, instant messaging, texting, and other, more recent jack-rabbit technologies that have lapped it. But e-mail is still maybe too fast for our brains to catch up with. The message came to us in a flash, we responded quickly, therefore it will vanish. We think it’s as ephemeral as the transaction.

Maybe speed also eats away at our superego. The desire to respond, to emote, can be so fierce that sometimes we do it before thinking. And once sent, an e-mail can rarely be called back. This can be a problem. Though we put a man on the moon, though we moved several space shuttles over bumpy roads to museums, we still haven’t managed to invent an all-powerful e-mail recall button. It’s worth remembering, too, that those fantastic free e-mail services many of us use are free for a reason. Data mining, pop-up ads, and goodness knows what other digital strings are attached that we ignore, blinded by convenience and the right price.

We hope Petraeus, his family, and all those involved in this dark and unhappy tangle find a way to heal. We also hope that the CIA weathers this moment. But it’s possible that Petraeus has presented the rest of us with what the therapeutic industrial complex calls a supremely teachable moment. E-mail is a fantastic tool. It’s revolutionized our world. Just don’t expect it to keep your secrets.

To read Stephen L. Carter on Obama and FDR and William Pesek on the president’s trip to Asia, go to:


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