G20 goes for bankerHaving written about the G20 (not to mention the G8) several times, I have finally cracked the code. “G” stands for globetrotters and 20 is the number of bottles of water the attendees must be seen to drink before the vino goes down. This time the top politicians met in Toronto and next November they zip over to Soul, perhaps since South Korea has just come third in an index of global competitiveness compiled by Deloitte and the US Council of Competitiveness.
The Toronto G20 agreed that in future banks must keep enough capital on their balance sheet to be able to withstand another 2008 style Lehman Brothers collapse. Under the present Basel 1 & 2 standard, banks must hold 8% of “safe capital”. But this is what the final communiqué said, “the amount of capital will be significantly higher, and the quality of capital significantly improved, when the new rules are fully implemented. This will enable banks to withstand, without government support, stresses of the magnitude associated with the recent financial crisis.” The consensus is that the 8% could rise to double figures but be vigorously contested by France and Germany whose banks traditionally hold less capital on their balance sheets than in the US or UK.
The focus on the French and German way of doing things is relevant, indeed the whole of Europe is affected. The Bank of International Settlements (BIS) warned in its recently published annual report, “Ultra low rates and fiscal stimulus by governments is exacerbating matters, causing moral hazard and leading to the sort of zombie banks seen in Japan during its so-called Lost Decade. Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out.” This is all a bit none-G20 ish.
The economic argument is as old as the hills. Stimulate and risk rampant inflation. Self-flagellate and get depressed. My personal view stays as it has been throughout this crisis (that is tracked in the Credit Crunch Diary – October 08 to October 09), the consumer materialistic world had gone mad. It has to be reined in: not encouraged back to life.
JGS - 29 June 2010
