Back to the BLOG? ..... Back to the HOMEPAGE?

If you still think that the Obama administration, or even our Federal Reserve is calling its own shots, or making it up as it goes along, have I got news for you.  And again it all comes from Basel, Switzerland. Listener Keri continues to come up with the most amazing links, sostart reading...

Since the start of the "crisis" in latter 2007, and especially since fall of 2008, the BIS's Basel Committee on Banking Supervision (BCBS) has been "reviewing" the Basel II Accord's minimum capital requirements, the Pillar 1 requirements.  You remember, those magical "requirements" that let European banks and US investment banks use CDO's to insure the leveraged amount of capital they had, and then claim the whole amount as Tier 1 capital?  Yeah, those requirements....well, now they are "under review"-- 

The following is from a March 29, 2009 release from the Bank for International Settlements of a speech by Nout Wellink.  First, a little about Mr Wellink.  He is the Chairman of BCBS (aka Basel Committee) at the BIS, as well as a member of the General Council at the ECB.  His biggest job, however, is as head of central bank of the Netherlands, Der Nederlandsche Bank.  Or maybe, his biggest job is at the Trilateral Commission.  He's one of 170 European members.  In fact, here's a document from the BIS's own website of a speech he gave at the 31st European meeting of the TLC at the Hague in 1997.  Even the Dutch don't like his connections to the TLC, as I found in an article from the Netherlands (don't know if the translated link will work, but if so here it is).  Seems they dislike supranational globalism as much as anyone else. 

Now to Mr Wellink's recent BCBS document: "Basel Committee initiatives in response to the financial crisis"  Regulatory capital  "The Basel Committee, in a press release issued on March 12th following its recent quarterly meeting, underscored the importance of a strong capital base as a necessary condition for a strong banking sector. It stated that the level of capital in the banking system needs to be strengthened to raise its resilience to future episodes of economic and financial stress. The Committee will do this through a combination of initiatives, which I will describe momentarily. Our press release also noted that the Committee will review the regulatory minimum level of capital, taking account of these initiatives. Our objective will be to arrive at a total level and quality of capital that is higher than the current Basel I and Basel II frameworks and appropriate to promote the stability of the banking sector over the long run. This effort will be phased in over a time frame that will not aggravate the current stress."  (pg 1, 2)

Later in the same document, pg 2, Wellink considers "procyclicality": "The Basel Committee has put in place a process to systematically assess the quantitative impact of Basel II on the level and cyclicality of capital. We will take appropriate steps if the results of our capital monitoring suggest the capital framework is unduly procyclical."

But...(same document, pg 3) "Once these different streams of work are further advanced, taken together they will form the basis for the Committee’s assessment of the appropriate level of minimum capital that should be put in place over the long term.  But whatever we do – and this gets back to my link between the near and long term – we must not raise global capital requirements in the middle of this crisis. Capital buffers are there to be used and we must provide a clear road map where we are headed." Well, duh, if they raised the capital requirements, then we'd only have SOUND banks left--they can't do that!!  

Wellink also mentions the second part of Basel II, Pillar 2.  Same document, pg 3: Better risk management and supervision "I have discussed the importance of having stronger global standards for capital and liquidity, but this is not enough. If firms have poor governance and risk management cultures or if supervision is weak, then we could again find ourselves with the types of problems we are now facing.  We propose to build on Basel II’s supervisory review process – Pillar 2 – to raise the bar for risk management and supervision practices. This past January, the Basel Committee published for comment supplemental Pillar 2 guidance. The purpose of this guidance is to address the flaws in risk management practices revealed by the crisis, which in many cases were symptoms of more fundamental shortcomings in governance structures at financial institutions. The Committee will strengthen its supervisory guidance and the links to the Pillar 2 review process. It is focusing on firm-wide governance and risk management; capturing the risk of off-balance sheet exposures and securitization activities; more effectively managing risk concentrations; and providing incentives to better manage risk and returns over the long-term, including compensation practices."  

Perhaps the fundamental "shortcoming in governance structure" is the BIS itself which ESTABLISHED the Pillar 1 minimum requirements in the first place!  (Ah, at least they are admitting it, I guess!)   This Pillar 1, 2, 3 business from the Basel II accord needs addressing.  These Pillar 1 capital "requirements" are the first example of an unelected, supranational banking cartel called the BIS mandating economic policy on sovereign states: through the very willing control of the central banks who have commandeered once-sovereign nations (including our own), the very banks which themselves are the sole shareholders of the BIS (including the Federal Reserve), the Basel II capital requirements were adopted uniformly and internationally, and look where we are today.  Wellink is admitting that Basel II has significant problems...why are we scurrying to implement yet more of its non-sense, now with Pillar 2? 

But back to Pillar 1 real quick: remember the FDIC's scathing review of the Basel II capital requirements in 2006?  It concluded, "that the revised Basel II capital rule should only be implemented in conjunction with alternative existing rules for determining capital, e.g. the FDICIA leverage based rule, and it should not replace the existing rules." (pg 14).  

Was that done?  NO.  Basel II implementation is SUPRANATIONAL.  The US regulations on minimum capital requirements, including the FDIC's leveraged based rule, were more stringent than Basel II's, but the Federal Reserve, with BIS Board Director Bernanke himself, said no, we have to use Basel II.  And remember John Lafalce's testimony to the House Financial Services Committee in 2005 on Basel II?  He sounded crazy in 2005.  He sounds like Miss Cleo, now!  "Current estimates of the capital that Basel II banks would have to hold for mortgage assets would also be at or below the capital level that led to the savings and loan crisis." "I see no consideration of safety and soundness at all in the Basel II debate, and no recognition of the danger of adopting a new capital regulation that goes in the exact opposite direction from the recent reforms concerning corporate governance, regulatory oversight, and internal controls."  "...there clearly is an effort afoot, pending Basel II's adoption, to abolish the leverage ratio as inconsistent with the principles of Basel II. Congress and U.S. regulators must not weaken our country's important regulatory protections such as the leverage ratio and prompt corrective action regulations to emulate the questionable supervisory oversight abroad."  

"Supervisory oversight abroad"....well, that brings us to Pillar 2.  Pillar 2 of Basel II is, indeed, the "Supervisory Oversight" Lafalce forsaw (because, like Alex Jones, he just reads the documents!).  According to Edgar Miester to the BIS, the Pillars of Basel II are, basically this (or you can see the full breakdown in the 284 pg BIS Basel II document):  "Pillar 1 is covering the minimum capital requirements set by supervisors, Pillar 2 is focusing on banks’ internal capital assessment and Pillar 3 is addressing market discipline and disclosure." (pg 1)  More precisely, the Basel II Accord itself calls Pillar 2 the "Supervisory Review Process."  It is just as it sounds: the BIS gets to supervise how everyone else supervises.  With this supervisory authority, among other things, Pillar 2 might actually be the first ever global wage control measure.  Read that last line of what Wellink said from above:  "(Pillar 2) is focusing on firm-wide governance and risk management....and providing incentives to better manage risk and returns over the long-term, including compensation practices." 

Compensation practices?  The Basel Committee seems to think that Pillar 2 is not enough in the hands of the banks themselves, they should have the supervisory authority to oversee them, including the "compensation practices" of banks.  While many outright socialist European nations might embrace that (or might not), Basel II has been implemented here--and therefore so will Wellink's Pillar 2 dreams.  Should we be surprised then that this exact same idea is on the tongues of everyone from the Congress to Obama, regarding supervising compensation?  Should we be surprised that Geithner (former BIS CPSS Chairman Geithner) said last week that he is open to firing bank executives?  Geithner, in response to the question of whether the CEO's of Bank of America and Citibank should be subject to the same removal as Wagoner of GM  "...And where that requires a change of management of the board, we'll do that." 

"We'll do that"... or the BIS will, maybe.  The increase in Pillar 2 supervisory authority that Wellink says the Basel Committee is seeking will certainly authorize that.  God knows what else.  We do know this from the Committee's own words: they want a "standardised" approach.  They want a standard regulator, an international regulatory body.  Which brings us to the G20.  We just came out of the G20 summit a couple weeks ago, and the big praise was laid upon the Financial Stability Forum. 

The FSF was the big hero, and just about everyone in the G20 embraced a long list of suggestions by the FSF, including the suggestion that the G20 authorizes a vast increase in the scope and regulatory authority of FSF.  The FSF is here to save the day, alright.  Yet, I don't remember any news articles--and I have read a lot--that pointed out exactly what the "Financial Stability Forum" is.  What is it anyway?  No one ever says, its very mysterious.  They probably never say because they don't research, and because the FSF doesn't exactly flaunt its heritage.  The FSF is part of the BIS.  It has its office in Basel.  It is headed by Andrew Crockett, the General Manager of the BIS.  No, the news doesn't mention that.  And apparently, they never even notice that the BIS website it practically identical in style and format to the FSF's, with only the colors different (that should be a give-away right there to any sleuth). 

So again, at the G20, the FSF was exalted as a global remedy to the lacking of a single, international (read: supranational) regulatory authority.  This is why Pillar 2 is becoming so important.  Basel II was implemented in steps.  The first was the capital requirements, Pillar 1.  That helped set off this crisis.  We are now moving into the supervisory regulatory process, Pillar 2.  This is setting up the excuse for unelected, supranational regulatory bodies to control firstly banking institutions with standardized, global requirements.  I believe this would be the precedent for the extension of this authority from "just" banks, to then supranational control of companies, monetary policy and economic activity (and I realize that is happening now, but I mean TOTAL control). 

The last one, which will presumably come after Pillar 2 because it is dependant upon standardized regulation, is what Basel II calls "market discipline and disclosure," Pillar 3.  They have to have the law-enforcer (Pillar 2) before they slap the handcuffs (Pillar 3) on the market.  Pillar 2, as it stands now when fully implemented--let alone what more Wellink wants--requires the release of everything from Board Meeting minutes to capital allocation choices to internal-risk assessment decisions.  BUT, it requires the release of that information to the regulatory central bank in any particular institution's domicile.  Of course, this doesn't mean much when dealing with an international bank, and that is exactly what Wellink and crew are counting on.  The minor conflicts in regulatory policy of Basel II countries and their individual Pillar 2 plans is a strawman set up to fail so the BCBS can come in and say, "see, we need a global standard for Pillar 2."  Which then means a global regulator with global regulations. 

This is apparent right now in the similarities between Basel II nations and their Pillar 2 plans: they all use the same language, which is the original BIS language. Each central bank calls the processes the Supervisory Review Process (SRP) and Internal Capital Adequacy Assessment Process (ICAAP), which are the two big elements of Pillar 2.  The ICAAP refers to internal risk-management by the banks, and the SRP refers to the sharing of that information with the Supervisor (for now, the national supervisor), who then has the authority to act in a number of ways.  The problem is not the regulations, it is the supranational, super-sovereign aspect of Pillar 2 (and all of Basel II, in my opinion), that gives the BIS the authority to decide what goes and what doesn't, over the independent nation itself. 

That is it, that is the start of global government when bunches of countries surrender their economic, legislative, and regulatory authority to some amorphous banking cartel in exchange for "financial stability".  And while the US is (thankfully) lagging behind in implementing Pillar 2 as we were lagging behind a bit in implementing Basel II itself, other countries have sprung forward.  And what we see in their efforts to accomplish this is exactly that surrender of sovereignty. 

For example, the UK's Pillar 2 is implemented by a private, independant, non-governmental body called the Financial Services Authority (FSA), which was authorized by the Parliament in 2000 through the Financial Services and Markets Act (like 1913 all over again).  Again, the FSA is private and non-governmental, and funded by the banks it regulates, and its job is to implement Basel II, among some other things.  Check out the FSA's UK's Pillar 2 (incidentally, a document which also says all firms must implement Basel II by Jan 1 2008).  It has all the same lingo as the Basel II doc: SREP, ICAAP, Pillar 2. 

As for the US, we call it the Pillar 2 "Supervisory Review Process."   And who's in charge of it?  You guessed it, the Federal Reserve.  We, however, are not totally done yet, and so comments from agencies like the FDIC, OTC, and Comptroller of the Currency were taken until final guidance in July 2008.  They offer input, the FR decides the policy.  And here's something important about the inclusion of the Comptroller of the Currency in the mix of advisors: our current Comptroller (since 2005) is John Dugan.  Mr Dugan also happens to the CHAIRMAN of the Joint Forum, a subgroup of the Basel Committee on Banking Supervision (BCBS), at the BIS itself.  Well, well, well. 

It is likely the US's Pillar 2 will be a print-out of the FSF's suggestions.  Or, we might be beaten to the chase by Wellink's super-BIS.  Above, I quoted from a speech Meister made to the BIS on Pillar 2.  There is one more good point he brought up worth considering: the possible conflicts of interest and unfairness that is inherent in a supervisory apparatus for an establishment like the BIS, which is owned by member banks.  He said,  "I am also skeptical how supervisors can be sure not to treat institutions unequally and as a consequence distort the level playing field."  To that I say: Don't worry, Mr Meister, I'm sure the last thing the BIS wants is a level playing field.